· Share price up 35% since our last recommendation. Since our previous Trading Buy recommendation on Magni- Tech Industries Bhd (MAGNI) when the share price was at RM4.34 on 6-Aug-2015, the stock has performed well, appreciating by 35% and strongly outperforming the benchmark FBMKLCI which declined by 0.5% to 1,686.51 points. In fact, MAGNI recently hit a new high of RM5.80 on 20-Oct-15 before profit taking kicked in.

· Positives already priced in? On 9-Sep-15, MAGNI proposed to undertake a bonus issue of up to 53.2m shares on a basis of one (1) bonus share for every two (2) existing MAGNI shares, with the exercise targeted to be completed by 4Q15. Since then, the share price has risen by 32% leading us to believe that the market has priced in the impact of the announcement, as we have seen no substantial changes in their earnings outlook.

· Outlook remains intact. We expect FY16-17E core earnings growth of 7-3% based on 5% YoY topline increase driven by: (i) strengthening USD, whereby our sensitivity analysis indicates a 5% appreciation in USDMYR could increase MAGNI’s bottomline by 3%, and (ii) stable cotton prices at 3-year’s low level (currently USD63/lb), compared to the 2011 peak at >USD200/lb. This should preserve FY16-17E margins at 7.4-7.3%.

· Switch to PRLEXUS for garment manufacturing play. Given the sharp increase in MAGNI’s share price recently, we think investors could consider another garment manufacturer, PRLEXUS (Trading Buy; TP: RM3.15 @ 10x FY16E PER), given the strong similarities between the two. We prefer PRLEXUS for: (i) stronger FY16-17E revenue growth at 18% (against MAGNI’s 7%), and (ii) capacity expansion in both China and Malaysian operations which we conservatively estimate could increase FY16-17E garment production by 12-16% and boost earnings by 15- 26% to RM23.5-RM29.7m.

· Fully valued – take profit for now. We have upgraded its Fair Value to RM6.30 (ex-bonus FV: RM4.20) based on 12.0x PER (previously 10x) applied on CY16E EPS of 52.5 sen. Given our lack of access to its management for more information, we maintain our FY16-17E earnings assumption at RM55.9-57.5m for FY16-17E EPS of 51.5- 52.9 sen (ex-bonus EPS: 34.3-35.3 sen). Our updated PER implies a 9% premium on peers’ average (11.0x) reflecting its largest market cap status (RM632m) among its peers (RM300m). Note that our valuation represents a 43% premium to the FBM Small Cap (FBMSC) FY16E Fwd. PER of 8.4x. We believe the premium is justified by MAGNI’s superior ROE of 18% against the FBMSC’s 9% as well as its USD-denominated earnings. Our updated FV represents limited share price upside of 9%. Hence, we believe MAGNI is now fairly valued and recommend investors TAKE PROFIT. 

Source: Kenanga Research - 29 Oct 2015