Investment Highlights

• We initiate coverage on Scientex with a BUY call and a fair value of RM10.74 based on sum-of-parts (SOP) valuation. This pegs its manufacturing segment to an FY22F P/E of 15x, at a premium compared to its peer stretch film makers’ average forward PE of 12.5x, to reflect its higher EPS growth rates of 21.6% and 13.2% in FY21–22F (vs. a weighted average of about 10% annually for its global peers).

• Scientex is an integrated flexible plastic packaging (FPP) maker which supplies to diverse sectors such as industrials and consumer-based products in the food & beverage (F&B) and fast-moving consumer goods (FMCG) sectors. It is one of the top three producers of industrial stretch film in the world (with an estimated global market share of about 5%) and a significant player in the FPP market in Asia-Pacific (with an estimated market share of 2% in the region). It is also a property developer focusing on affordable housing in Malaysia with an outstanding GDV of RM12.8bil.

• Scientex’s earnings growth will be underpinned by its FPP manufacturing (which will in turn be driven by growth in key markets such as F&B, FMCG) and new property launches.

• The key investment merits of Scientex are:
   
  • The bright prospects of the global FMCG packaging sector with a CAGR projected at 4.1% from 2017 to 2024 to US$623.6bil by Market Watch (an investing and financial website), underpinned by: (1) global consumer spending projected at a CAGR of 4.8% in 2017–2024 according to the International Omni Retailing Markets Association (IORMA); and (2) a shift in consumer preferences to on-the-go food and beverages due to a hectic lifestyle and higher food safety standards.
     
  • Scientex has proven its ability to grow significantly faster than the industry and shall continue to do so (i.e. at a CAGR of 20% in 2017–2024), having put in place the following: (1) extensive R&D in developing reliable, high-quality and thinner stretch film without compromising on tensile strength; (2) cost efficiency stemming from economies of scale; and (3) a merger and acquisition (M&A) pipeline, having taken over smaller peers such as GW Plastics and Daibochi Bhd in the past.
     
• At about 10.5x forward earnings in its entirety, we believe this home-grown regional/global plastic packaging player is a compelling investment case given its strong foothold in a consumer-fuelled sector.

Source: AmInvest Research - 17 Sept 2020