MTAG (0213) is a industrial stock listed on ACE market only in 2019. Since its listing, the company has been consistently distributing dividend of 3 cent per year, giving a dividend yield of around 5% based on its current share price of RM0.57. The main purpose of its IPO fundraising is to buy a new piece of land to construct a new factory for expansion, but this plan has been put on hold. Its business performance since listing is considered stable but nothing too exciting. However coming to the latest quarter ending Sep 2022, the result shows considerable improvement. So let’s dig into the details.
Table of Contents
Background of MTAG
Relationship between MTAG and Dyson
Before discussing MTAG, let’s talk about EMS industry in Malaysia first. Full name of EMS is Electronic Manufacturing Services. EMS companies basically manufacture products or semi-products on behalf of big brands. And among EMS companies in Malaysia, there are quite a few companies work for famous UK brand Dyson.
MTAG is not a EMS company, however its business is closely related to Dyson’s supply chain in Malaysia. Dyson is not a direct client of MTAG, however according to disclosure in the IPO prospectus, 70 to 80% of revenue are contributed by EMS companies working for Dyson, such as Jabco Filters, ATAIMS, VS etc. Among these companies, Jabro Filters is the no.1 contributor.
Why must all these companies source materials from MTAG? According to the IPO prospectus, any components to be used in Dyson’s products must be source from qualified suppliers, and MTAG is a Dyson’s qualified supplier. According to MTAG, this qualification process is stringent and time consuming, so this sets the barriers for other competitors to participate, and that is why MTAG can gain from Dyson’s supply chain in Malaysia.
Although MTAG is a beneficiary of Dyson’s supply chain, this also creates a customer concentration risk for MTAG. It is worthwhile to note that MTAG does not have long term supply contracts signed with their customers, so any change along the supply chain would create imminent impact on MTAG.
Business of MTAG
MTAG reports its business based on two segments, Converting and Distribution.
Under converting segment, MTAG provides various stickers, labels and steel products. Converting typically contributes approximately 80% of the revenue, with the remaining 20% coming from Distribution segment. Under Distribution segment, MTAG sells products under other brands such as 3M and Henkel.
Within converting segment, the product contributes the most is “filter media and mesh”, which is the component that MTAG supplies to its biggest customer Jabco Filters.
Besides reporting based on business segments, MTAG normally also reports its business based on geolocation. Based on the report, most of its business are contributed from domestic market (around 85% to 90%, most from southern Malaysia), while oversea market only contributes around 10 to 15%.
Financial Status of MTAG
Net cash company
Since MTAG utilized the fund raised from IPO to pay off all the debts in 2019, it has become zero debt company till date. Considering both cash and short term investment on hand, cash per share is RM0.19.
IPO utilization
MTAG raised RM72 million from IPO, and RM42 million was supposed to be used for expansion. However so far, MTAG only utilized RM7.4 million out of the RM42 million to purchase new machine (fully digital press printing machine), a very large portion remains utilized. Although the planned expansion during IPO is on hold, thinking in a good way, this also means MTAG will have no problem financially for future expansion and generous dividend payout.
Dividend payout
Policy of MTAG is to distribute at least 20% of profit as dividend. Based on records since listing, the actual dividend payout is around 60%. With its cash on hand, until the expansion plan materializes, there should be no problem for MTAG to maintain this level of dividend payout.
Gross margin
Below is record of gross margin MTAG recorded since its listing
- FY2020 – 31.9%
- FY2021 – 27.8%
- FY2022 – 28.3%
- FY2023 (up to Q1) – 35.5%
The latest quarterly result (FY2023 Q1)
- I actually have followed up on MTAG for some quite time. Its results has been stable, but nothing surprised me. The reason I wrote this article at this timing, is because of its exceptional result posted for 2022 Q3 (FY2023 Q1). Result of this quarte sees noticeable improvement from previous quarters. From gross margin record summarized above, it can also been seen that gross margin of 35.5% posted for this quarter is much more better than its historical average, and its net margin also hits beyond 20%.
- There is no clear explanation given in the quarterly report why MTAG posted a much better result in this quarter, so as investors we can only guess. First, MTAG procured a new fully digital press printing machine in FY2022, so this could be one of the reasons to bring in more revenue?? In addition, from the notes in quarterly report, we can see contribution from Distribution segment is higher than usual (around 24%, typically it is less than 20%), and export distribution is also higher (around 14%, typically less than 10%).
- Despite good revenue and profit, MTAG actually registered negative operating cash flow in this quarter due to cash tied up with working capital. Not a big concern for me at this point of time, but definitely something to continue monitoring.
The end
The technical level of MTAG’s business does not seem very high to me. However based on records since listing, it can have gross margin of around 30% and net profit of around 16-18%, which are very good. And this is actually one of the reasons why I started to look into this company at the first place. Normally if a business can make good profit easily, it will attract competitors and eventually the competition could bring down margin of the business. With the good margin that MTAG can maintain, the company must be doing something right.
I’m not sure what is economic moat for MTAG, but I think becoming supplier recognized by Dyson, and having distribution right for reputable brand such as 3M, could be the reason why it can keep competitors at bay.
After release of good result for 2022Q3 (FY2023Q1), share price of MTAG has gone up slightly. To invest in this company, the key is to know whether this good revenue and margin are sustainable, so the next quarterly result is very important.
PS: After finished my study on MTAG, only realized the famous investor in Malaysia Cold Eye is also on the list of top 30 shareholders. His shareholding is not considered a lot compared to his other holdings, and of course we cannot use this to determine whether we can invest in a company or not. But still, knowing that I was looking at a company that also interests him, still make me happy.
In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.
Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.