Investment Highlights

• We reduce our FY21–23F net profit forecasts by 3% each and trim our fair value (FV) by 4% to RM4.54/share (from RM4.72/share) based on sum-of-parts (SOP) valuation (Exhibit 1). We peg Scientex’s 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 14.8% and 12.6% in FY21– 22F (vs. a weighted average of about 10% annually for its global peers). Our FV also imputes a 3% premium to the SOP to reflect our 4-star ESG rating (Exhibit 2).

• Here are the key highlights from yesterday’s analyst briefing:
  1. Scientex is unperturbed by the recent uptrend in resin prices, particularly polyethylene (PE) and linear lowdensity polyethylene (LLDPE), as there is a cost passthrough mechanism being put in place. Nonetheless, there is a time lag of about a month (as prices of endproducts are adjusted monthly in accordance with the fluctuation in input costs). Typically, its manufacturing division enjoys slightly better margins when resin prices are in a downtrend and vice versa. As such, we trim our margin assumption slightly to reflect the current upward trend in resin prices.
  
  2. The group launched RM775.5mil worth of new property projects in 1HFY21, comprising largely of 2,992 units of affordable homes in Penang (Tasek Gelugor, take-up rate >90%), Selangor (Kundang Jaya, take-up rate >90%), Melaka (Durian Tunggal) and Johor (Kota Tinggi, take-up rates 60%). It is therefore on track to meet its target of RM1.6bil new launches in FY21F, comprising 6,000 units of affordable housing (with an average price of RM267K/unit). Our earnings forecasts conservatively assume FY21F new launches of RM1.3bil.
  
  3. We understand that the demolition of Scientex’s automotive interior plant in Shah Alam, Selangor is still 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 already imputed this in our forecasts.

• 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 above-trend earnings growth rates of 14.8% 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 11x its 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 - 11 Mar 2021