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.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....