Scientex Berhad (SCI MK)

Riding on Demand for Affordable Housing

• We recently met with the management of Scientex Berhad (Scientex) and came back with a mixed outlook on its overall prospects.

• We believe its earnings growth prospects remain encouraging driven by growth in the Property segment leveraging on steady demand for affordable housing. However, we exercise caution in the Packaging segment due to weaker demand that result in subdued utilisation rate of 55-60% in the intermediate term.

• Scientex also serves as a proxy for the recyclable plastics sector, aligning with heightened ESG concerns by actively promoting ecofriendly products and contributing to a more sustainable and responsible approach within the industry.

• We maintain a HOLD recommendation on Scientex with an unchanged TP of RM4.15. Our valuation is derived from a Sum of Parts (SOP) methodology.

Bright Prospects in the Property segment

We remain in favour of Scientex for its strong position as an affordable housing developer with a robust brand name in Southern Peninsular Malaysia, particularly Johor as well as its market presence in North Peninsular Malaysia. The group has shared that its unbilled sales currently stand at RM1.5bn and it expects property sales to exceed RM1.8bn for CY2024. We anticipate continued strong take-up for its project which targets the low to mid-income population in suburban areas, offering homes in the price range of RM250-500k. The recent strategic land acquisitions in Kulai and Muar, Johor, reflect the group's foresight in catering to the working population traveling to Singapore. Additionally, it also positions Scientex as a potential beneficiary of the KL-Singapore HighSpeed Rail (HSR), with the prospect of a train station in Muar.

Effective Strategies in Land Acquisition

Among the factors considered by Scientex when choosing land acquisition are aspects such as strategic location, allowing easy accessibility, a high population density, and cost-effectiveness. The group stated that land cost constitutes up to 20% of the gross development value (GDV) of the land. Besides, Scientex typically targets agricultural land and converting it into residential land. The process usually takes about 6-9 months. In addition, the first phase of the project is expected to be launched within 1-1.5 years after the land acquisition.

Cautiously Optimistic on Packaging Segment

The management shared that the utilisation rates (UR) of the segment is currently hovering between 55-60% which is slightly higher than 50-55% previously. It expects the UR to recover further to above 60% threshold in the near term based on recent improvements in order volumes particularly from consumer segment. Nonetheless, we are of the view that the outlook for packaging to remain challenging amidst soft global economy. Besides that, we anticipated that margins would experience compression given the potential for upward movements in resin prices coupled with the escalation of energy costs, therefore adding pressure on the segment’s profitability.

Elevating its Commitment to Sustainable Products

It is important to note that regulations and consumer preferences on packaging sustainability are evolving and Scientex are increasingly working towards more environmentally friendly solutions. We understand that more than 80% of Scientex's product portfolio is already dedicated to recyclable packaging products. Leveraging their existing expertise and familiarity with this technology, Scientex is well-prepared to seamlessly transition from non-recyclable products to recyclable ones, with no adverse cost impact on the group. Also, ongoing research and development initiatives are consistently aligned with addressing customer needs and advancing sustainable goals.

Reiterate HOLD at TP of RM4.15

We make no change in earnings forecasts. Maintain a HOLD recommendation on Scientex with an unchanged TP of RM4.15. Our valuation is derived from SOP methodology. Overall, Scientex business prospect is expected to be driven by i) organic expansion and M&A activities in plastic packaging space for long-term growth, ii) strong position as an affordable housing developer, and iii) high commitment to sustainability and the environment in their plastic product offerings.

Source: BIMB Securities Research - 16 Feb 2024