Investment Highlights

• We maintain our BUY call, forecasts and fair value of RM10.74/share for Scientex based on sum-of-parts (SOP) valuation (Exhibit 2). This pegs its manufacturing segment to FY22F P/E of 15x, at a premium 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’s FY20 core net profit of RM390.1mil came in within our forecast but beat the consensus estimates by 6%.

• Scientex’s FY20 core net profit grew 17% YoY, driven largely by the manufacturing division. The unit’s top line grew 8% YoY boosted by the first full-year contribution from 61.9%-owned Daibochi. Its EBIT surged by a larger 43% thanks largely to an improved EBIT margin of 9.8% (vs. 7.4% previously) arising from: (1) a better product mix that was skewed towards the high-margin printing and lamination products; and (2) improved efficiency stemming from reduced wastage, better inventory controls, customised solutions and integration within its operating units.

• Despite the disruption from the pandemic and the movement control order, its property development unit still managed to register a 4% increase in EBIT YoY driven by: (1) FY20 sales of RM968mil underpinned by RM885mil of new launches, largely affordable residential units priced at an estimated average of RM275K/unit in Senai, Pulai, Kulai and Pasir Gudang in Johor and Melaka; and (2) progress billings from unbilled sales (that stood at RM600mil as at end-July 2020).

• Separately, Scientex has proposed a 2-for-1 bonus issue and a 1-for-5 (before the bonus issue) free warrant issue with an indicative exercise price of RM4.00. For illustration purposes, an investor who owns 1,000 Scientex shares prior to the ex-date shall end up with 3,000 Scientex shares plus 200 Scientex warrants after the ex-date. Ex-all, our fair value for Scientex shall adjust down to RM3.61.

• Key highlights from the group’s analyst briefing last Friday are:
  
  1. Scientex plans to shut down and demolish its automotive interior plant in Shah Alam, Selangor, by January 2021. It will then reconstruct, on the same site, a new robotic stretch film plant with an initial capex of RM150mil (4–line phase 1) and four more lines in another 3–4 years. The additional four lines will have an industrial stretch film capacity of 30.0K MT/year and it should be commissioned in end-CY21 or early CY22.
  
  2. There has been an ongoing effort to move up the value chain by upgrading the production facilities at Daibochi and Mega Printing to produce more downstream value-added products that fetch better margins, such as printing and lamination. In addition, Daibochi has earmarked RM100mil capex in FY20–21F which will boost its printing and laminating production capacity by 60% to an estimated 20.3K MT/year.
  
  3. For its property development business, Scientex has RM1.6bil new launches in FY21F in the pipeline, comprising largely 6,000 units of affordable housing units (with an average price of RM267K/unit) in Pulai, Johor and Durian Tunggal, Melaka. In our earnings forecasts, we conservatively assume FY21F new launches of only RM1.3bil.
   
• We continue to like Scientex for: (1) the strong prospects of the packaging industry due to consumer spending, a shift to the on-the-go food and beverages due to a hectic lifestyle and higher food safety standards; (2) its above-trend earnings growth rates of 21.6% and 13.2% for FY21–22F (vs. a weighted average of about 10% annually for its global peers) thanks to extensive R&D, cost efficiency initiatives and an M&A pipeline; and (3) A robust property development business despite the soft market in general thanks to its right focus on predominantly landed affordable residential units in secondary suburbs.
   
• At about 10.5x forward earnings in its entirety, we think that this home-grown regional/global plastic packaging player is highly compelling given its strong foothold in a consumer-fuelled sector.

Source: AmInvest Research - 21 Sept 2020