Investment Highlights

• We maintain our BUY call, forecasts and fair value of RM4.72/share for Scientex based on sum-of-parts (SOP) valuation (Exhibit 3). 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 respectively (vs. a weighted average of about 10% annually for its global peers). We have also adjusted for a 3% premium to reflect its 4-star ESG rating as appraised by us (Exhibit 4).

• Scientex’s 1HFY21 net profit came in at 44% of our full-year forecasts and 46% of full-year consensus estimates. However, we consider the results within expectations as we expect stronger quarters ahead due as property sales shall pick up with the gradual lifting of the movement control order nationwide.

• Scientex’s 1HFY21 net profit grew 15% YoY, driven largely by the manufacturing division. The division’s EBIT surged by 9% thanks largely to an improved EBIT margin of 10.9% (vs. 9.2% previously) – arising possibly from: (1) better product mix that was skewed towards the downstream high-margin printing and lamination products from 61.9%- owned Daibochi; and (2) improved efficiency due to reduced wastage, better inventory controls, customized solutions and integration within its operating units.

• Despite the disruption from the movement control order, Scientex’s property development unit still managed to register a 4% YoY increase in EBIT to RM144.4mil in 1HFY21, driven by sales of RM506mil underpinned by RM775mil of new launches, mainly from its developments in Kota Tinggi, Pulai (Johor) Tasek Gelugor (Seberang Perai), Kundang Jaya (Selangor) and Durian Tunggal (Melaka).

• We expect the unit’s performance to continue improving in the coming quarters, driven by: (1) progress billings from unbilled sales (that stood at RM900mil as at end-Jan 2021); and (2) RM1.6bil new launches in FY21F, comprising largely of 6,000 affordable housing units (with an average price of c.RM267K/unit) in Pulai and Durian Tunggal. 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 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 10–11x fully-diluted FY23F 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 - 10 Mar 2021