Apparel maker Makalot Industrial Co (聚陽) reported better-than-expected pretax profit for last quarter, a sign that the negative effects from a fire at a facility in Vietnam in July have ended, Yuanta Securities Investment Consulting Co (元大投顧) said on Wednesday last week.
Makalot’s operating margin improved 0.8 percentage points from a year earlier to 9.9 percent last quarter, with gross margin rising to 19.9 percent over the same period, reflecting efficient factory management after the incident, Yuanta said in a research note, adding that the company had no extra air shipping expenses for deferred orders in the July-to-September quarter.
Makalot received an insurance payment of NT$60 million to NT$70 million (US$1.96 million to US$2.29 million) from a policy that covered the fire, which affected two plants, Yuanta said.
It has replaced 80 to 90 percent of capacity lost in the incident through shuffling and outsourcing, Yuanta said.
Makalot has six plants in Vietnam. The two plants affected by the fire mainly produce low-end apparel for the US market and their combined pre-fire capacity was about 5 percent of overall output.
“We remain positive on the stock for the long term and view it as a key beneficiary of transferred orders from brand clients due to the [US-China] trade war,” Yuanta said.
Makalot, a manufacturer of ready-to-wear apparel and functional clothing, counts GAP Inc, Fast Retailing Co’s GU sub-brand, Kohl’s Corp, Target Corp, Walmart Inc and Hanesbrands Inc among its major clients.
In the first nine months of the year, cumulative revenue increased 15.53 percent annually to NT$20.6 billion, while pretax profit rose 34.28 percent to NT$1.95 billion in the same period.
Earnings per share were NT$8.88 from January to last month, the company said in a regulatory filing on Tuesday last week.
With order visibility of four months and some orders from last quarter deferred to this quarter, sales this quarter are forecast to grow 10 to 15 percent year-on-year, Yuanta said.
SinoPac Securities Investment Service Corp (永豐投顧) said in a separate note that Makalot’s two fire-affected plants are expected to be renovated and automated, before resuming mass production at the end of the first quarter next year.
While clients have become cautious given macro-economic conditions, the company is expected to benefit from increasing orders from brand clients and new industry dynamics, SinoPac Securities said on Tuesday last week.
“Structural changes in the apparel industry — such as rekindled demand for plain weave and fashion apparel — will help fuel the company’s operational momentum and gross margin expansion,” SinoPac Securities said. “In addition, clients Target and GU have powerful growth outlooks for 2020.”
However, the company’s capacity would remain tight over the next one or two years, as added capacity expected in the industry next year might be swiftly absorbed, SinoPac said.
Shares of Makalot rose 5.45 percent last week and closed at NT$174 on Friday in Taipei trading.
Yuanta retained its “buy” rating for Makalot, but cut its 12-month target price to NT$233 from NT$250 to reflect a more neutral sentiment, as growth is likely to be slower next year due to a high comparison base this year.
SinoPac also adjusted its target price from NT$244 to NT$216, citing a seasonal pattern for this quarter, when Makalot’s sales tend to be lower than the previous quarter.
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