Dynamic Duo: Initiating at BUY

We initiate coverage on Scientex with a BUY rating and RM10.10 price target. Scientex is a Top 5 global player in stretch film packaging and a leading developer of affordable homes in Peninsular Malaysia. We like its impeccable earnings track record and execution, largely attributable to its solid management team. Riding on global demand for stretch films and a successful property strategy, we forecast a FY18-21E EPS CAGR of 10.2%. At 12.7x FY20E, valuation looks attractive and shares could further re-rate amidst its yet limited institutional ownership.

Vision 2028: Revenue Target of RM10bn Via Organic Growth and M&A

Under its Vision 2028 strategy, Scientex aims to hit RM10bn in revenue by 2028 through organic and M&A-led expansion, implying a 10-year revenue CAGR of 14.3%. Under the 2028 strategy, Scientex will also be building 50k units of affordable homes (completed 17k units since 1995).

Higher Plant Utilisation & Margin Relief to Drive Manufacturing Earnings

Average utilisation rates for the manufacturing division are expected to grow to 70%-77% over FY19-21E (from c. 66% in FY18), as the Group progressively fills up capacity for its stretch film (US Arizona plant) and custom film (BOPP plant) to cater to the increased demand for flexible plastic packaging for both the domestic and export markets. Elsewhere, we expect pressure on manufacturing margins to ease from FY20E on softer resin prices and a higher-margin mix, negated by a stronger RM (vs. US$).

Riding on Increasing Demand for Affordable Housing

The Group’s property launches have been very saleable, thanks to its focus on the affordable housing segment. In the nearer term, Scientex’s property prospects will be supported by unbilled sales of RM500m (as at 1QFY19) and RM1.0bn worth of project launches coming in FY19 (FY18 project launches of RM1.2bn). Scientex’s GDV of RM13.5bn is expected to sustain the group over the next 10 years.

Initiating Coverage With BUY and TP of RM10.10

We value Scientex at RM10.10 based on our SOTP valuation, pegging its plastic manufacturing business at 17x FY20E PER (+2SD of sector mean PER, given its solid track record and leadership position) and property business at a 40% discount to its property RNAV. At a 12.7x FY20E PER, Scientex’s valuation looks attractive. Risks to our call include: (1) higher- /lower-than-expected resin costs, (2) stronger/weaker export sales, and (3) stronger-/weaker-than-expected property sales.

Source: Affin Hwang Research - 17 Jan 2019