Investment Highlights

• We maintain our BUY call, forecasts and update our fair value to RM4.72/share (from RM12.69/share previously) following the completion of a 2-for-1 bonus issue and a 1- for-5 (before the bonus issue) free warrant issue and the rolling forward of our base year to FY23F for Scientex based on sum-of-parts (SOP) valuation (Exhibit 1).

• We peg its manufacturing segment to an FY23F P/E of 18x, at a premium compared to its peer stretch film makers’ average forward PE of 12.5x, to reflect its higher fully diluted EPS growth rates of 17.7% and 12.6% in FY21–22F (vs. a weighted average of about 10% annually for its global peers). We have also adjusted for a +3% premium to reflect a 4-star ESG rating as appraised by us (Exhibit 2).

• We understand that the demolition of Scientex’s automotive interior plant in Shah Alam, Selangor is currently in progress. This is part of its plans to build, on the same site, a new robotic stretch film plant (4 lines in phase 1 and four more lines in another 3–4 years). The new plant, with an industrial stretch film capacity of 30.0K MT/year, is scheduled for completion and commissioning in mid-CY22. We have imputed this into our forecasts.

• Also, Scientex’s property division is on track to register better earnings in coming quarters driven by: (1) progress billings from unbilled sales that stood at RM760mil as at end-Oct 2020); and (2) RM1.6bil new launches in FY21F, comprising largely of 6,000 affordable housing units (with an average selling price of c.RM267K/unit) in Pulai, Johor and Durian Tunggal, Melaka. In our earnings forecasts, we conservatively assume FY21F new launches of only RM1.3bil in GDV.

• We continue to like Scientex for: (1) the strong prospects of the packaging industry due to consumer spending, a shift to on-the-go food and beverages due to a hectic lifestyle and higher food safety standards; (2) its abovetrend earnings growth rates of 17.7% and 12.6% for FY21- 22F (vs. a weighted average of about 10% annually for its global peers) due 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 12x fully-diluted FY22F 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 - 5 Mar 2021