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MGI Digital Technology: Experiencing growth in its own unique niche

Publication Date: 23 Nov 2018 - By Samuel Smith By Samuel Smith
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK UK Technology

MGI Digital Technology is experiencing robust growth thanks to their award-winning line of versatile digital printing and finishing solutions.

The company has carved out a niche moat for itself by providing innovative and affordable printing and finishing technologies for over 33 years, building strong relationships with customers and continuously differentiating themselves from the competition in terms of product capabilities, versatility and scope of applications. 

Driving this innovation is MGI’s 20% reinvestment of sales into its R&D center, which combines electronics, IT, micro-mechanics, inkjet, chemistry and color science to produce enhanced and cheaper products.

Management then leverages its global distribution network (reaching more than 70 countries) to get these market-leading products to diverse list of customers. Adding to cash-flow stability and generating countless opportunities for growth is the fact that MGI’s products are used in a wide range of industries, including government agencies, packaging firms, newspapers, photo labs, and book printers.

In the first half of 2018, MGI reported continued robust growth momentum: ~11.5% revenue growth and 24.5% Operating Income growth.

Thanks to improving economies of scale, strong brand power, and improvements in the global distribution network, gross margins also improved 7.5% year-over-year and operating expenses as a percentage of revenue declined substantially year-over-year (16.3% to 12.1%).

The balance sheet also looks healthy, as ~€7.5 million of operating cash flow made shareholder equity increase nearly 8% during the first half of the year and enabled management to pay down €1.2 million of debt.

This reduced the total outstanding debt to €10.3 million while boosting the cash pile 6.3% to €20.3 million. As a result, MGI enjoys a positive net current asset value, making it a very conservatively financed company with plenty of liquidity to service the remainder of its debt and fuel further growth.

In the second half of the year, MGI is confident it will continue to generate strong growth results thanks to its strong order log and the continued roll-out of its distribution network improvements. The company also plans to participate in important exhibitions in Europe (all4pack, LuxePack) and the U.S. (Print USA, LabelExpo) where it plans to boost visibility of its latest innovative products to leading clients and product reviewers in the industry.

Moving forward, the stock price will likely be highly sensitive to growth rates given that it currently stands at a fairly high P/E ratio of 33.5. A key area in which MGI hopes to continue delivering strong growth is in the large Chipless RFID market, where it offers a product that management believes is peerless in terms of costs and functionality and will revolutionise the way the technology services e-commerce and logistics businesses. 

Conclusion: While MGI may very well execute on its growth ambitions, the stock remains speculative due to the niche nature of the market, the company’s fairly small size, and its elevated P/E. As such, investors should limit it to a small portion of their portfolios.

 

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London, United Kingdom

info@reachx.co
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