Yuanta Securities Investment Consulting Co (元大投顧) on Friday downgraded its rating on Makalot Industrial Co Ltd (聚陽) from “buy” to “hold” over concerns that the uncertainty caused by the COVID-19 pandemic would extend into the third quarter of this year and that orders would decline, as the ready-to-wear apparel maker’s brand customers are highly sensitive to market conditions.
Weighed by the pandemic, which has led to lockdowns across the world, the uncertain order outlook is clouding the company’s gross prospects in the near term, Yuanta said in a note.
Makalot’s top six clients have asked the firm to suspend production and defer most orders for the second quarter due to lockdowns announced this month in the US and Japan, it said.
Order visibility for the third quarter is also low, as customers are likely to increase inventory above a healthy level if lockdowns continue next month and extend into June, it added.
“As such, we revise down earnings per share to NT$7.02 for 2020, down 19 percent year-on-year, and lower our target price to NT$119 to reflect weak fundamentals and a market de-rating,” compared with the previous target price of NT$188, Yuanta said.
Makalot shares rose 0.43 percent to NT$116.5 in Taipei trading, but have fallen 26.03 percent since the beginning of this year.
Makalot counts GAP Inc, Fast Retailing Co’s GU sub-brand, Kohl’s Corp, Target Corp, Walmart Inc and Hanesbrands Inc among its major customers.
The company on Thursday reported that pretax income in the first quarter fell 6.84 percent annually, but grew 17.7 percent quarterly, to NT$584.29 million (US$19.41 million), as the pandemic affected operations in the regional supply chain and reduced its capacity utilization.
Gross margin fell 2 percentage points from a year earlier to 19.8 percent, while revenue declined 8.76 percent annually to NT$6.13 billion, the lowest in five quarters, the company said.
Gross margin might fall further in the coming quarters due to a lower utilization rate, as the company has cut outsourcing orders from 10 percent of total sales to a single-digit percent, lowered daily working hours from 10 to eight and increased weekly days off from one to two amid weakening demand from customers, Yuanta said.
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