Investment Highlights

• We maintain our BUY call, forecasts, and fair value (FV) of RM5.01/share for Scientex based on sum-of-parts (SOP) valuation (Exhibit 1). We peg Scientex’s manufacturing segment to an FY23F PE of 18x, at a premium compared to its peer stretch film makers’ average forward PE of 12.5x, to reflect the unit’s higher earnings growth of about 13% annually in FY21-23F (vs. a weighted average of about 10% annually for its global peers). Our FV also imputes a 3% premium to the SOP based on our 4-star ESG rating as appraised by us (Exhibit 3).

• Scientex’s 9MFY21 net profit came in at only 70% of our full year forecasts and full-year consensus estimates. However, we consider the results within expectations, underpinned largely by a seasonally strong 4Q property profits.

• Scientex’s 9MFY21 net profit grew 27% YoY, driven largely by both its core segments. Its manufacturing unit’s EBIT surged by 9% thanks largely to an improved EBIT margin of 10.5% (vs. 9.3% previously). We believe that the stronger performance arose from: (1) a better product mix that was skewed towards the high-margin downstream printing and lamination products (produced by 61.9%-owned Daibochi); and (2) improved efficiency stemming from reduced wastage, better inventory controls, customised solutions and integration within its operating units.

• Despite the disruption from the movement control order, Scientex’s property division unit managed to register an impressive 28% YoY increase in EBIT to RM228.4mil in 9MFY21, driven largely by RM811.5mil sales largely underpinned by RM1.2bil of new launches, mainly from its developments in Tasek Gelugor in Seberang Perai, Kundang Jaya in Rawang, Selangor and Durian Tunggal 2 in Melaka.

• We expect its property profits to continue improving in the coming quarters driven by: (1) progress billings from unbilled sales that stood at RM920mil as at end-April 2021; and (2) RM1.6bil new launches in FY21F, comprising largely 6,000 units of affordable housing units (with an average price of c.RM267k/uniK) in Pulai, Johor 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 on-the-go food and beverages due to a hectic lifestyle and higher food safety standards; (2) its packaging-related manufacturing unit that is projected to grow at about 13% annually in FY21–23F (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 11–12x 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 - 24 Jun 2021