kcchongnz blog
Cash flows of Scientex Berhad kcchongnz
The job of every company is to make money, and there is no money like cash. Cash flow from operations (CFFO) is the purest inflow and outflow of cash in relation to actually doing business. From a company health perspective it is one of the most important measures.
Companies require capital expenses in purchasing and upgrading plant and equipment for growth. The money is not gone. It is carried on the balance sheet as an asset. The end goal is for the company to generate a return on the asset. Free cash flow (FCF) is what is left after those expenses.
Free cash flow is like the end all goal of companies. The point is to do so well that you make so much money that even after all the checks written to expand the business you still have a lot of cash. Cash is pretty much the most important thing, and FCF is the most flexible kind of cash there is. With this internally generated FCF, a company can pay out dividend consistently, buy back its shares when they are selling cheap, pare down loans, or invest in other profitable ventures, all done without assuming more debts which makes the business more risky in times of the down turn in economy, or asking more money from shareholders, or issuing more shares to private investors, often at a discount, and hence diluting the earnings per share of the existing shareholders.
There are some companies doing so well that even after heavy expansion they have a lot of cash left over. Scientex Berhad is one of them, and it has been using this FCF to do most of the above.
Scientex Berhad
Scientex Berhad is engaged in two operating segments: property segment, which is in the business of constructing and developing residential and commercial properties, and manufacturing segment, which is mainly in the business of manufacturing various packaging products and manufacturing materials for automotive interior. Included in this segment is also the marketing and sales of laminating polyurethane adhesives. The packaging business unit manufactures various packaging products, which caters for packaging for logistics purposes, general purpose packaging and packaging for bulk handling. The polymer business unit manufactures polyvinyl chloride (PVC) leather cloth, PVC/polypropylene (PP) and PVC/polyethylene (PE) foam and thermoplastic olefin/PP foam sheets for automotive instrument panels, door trims and headlining for car manufacturers in the Asia Pacific region.
I have written a couple of investment thesis on Scientex since 14 months ago when its share price was at RM5.74 apiece as shown in the link below.
http://klse.i3investor.com/blogs/kcchongnz/56316.jsp
Subsequently I wrote another article updating the valuation of Scientex as shown in the link here:
http://klse.i3investor.com/blogs/kcchongnz/60563.jsp
Scientex just announced unaudited earnings results for the year ended July 31, 2015. Revenue for the year improved by 13.3% to RM1.8b and operating income jumped by 18.6% to RM225m. Earnings per share, EPS was 70 sen, against 67 sen a year ago. Net cash from operating activities was RM190m, against RM154m a year ago.
At the close of RM7.40 today, the PE ratio is 10.5; not that cheap compared to its historical PE ratio, and an enterprise value of 8.7 times its operating income. However, it is slowly transforming itself to a big regional PVC/polypropylene and PVC/polyethylene business. The attractiveness of investing in Scientex actually lies in its cash flow.
Cash flows of Scientex
For the latest annual financial results ended July 31st 2015, net income is RM162m while its cash flows from operations (CFFO) is 17% more at RM190m. This signifies the good quality of its earnings. It spent a considerable amount of money in capital expenses of RM116m, and yet there is still abundant free cash flow, FCF of RM74m left. This is 4.1% of revenue and 6.3% of invested capital (IC), in hard cash. It is from this FCF that RM47m was paid out as dividends, and partly paid down its debts.
Figure 1 below shows that the growth of net profit of Scientex at a compounded annual growth rate, CAGR of 30% for the last 12 years.
There is not a single year when it made losses. CFFO grows at tandem and it has been consistently above the CFFO, showing a high quality earnings.
Scientex does use considerable amount of debt of a total of RM254m. However this debt is only 0.24 times its total equity, and its CFFO covers a whopping 23 times its interest payment. Scientex has done a good job utilizing other people’s money to yield a high return on equity of 19%.
Not only CFFO is positive every year, its FCF is also positive every year without fail, except for a single year in 2004 when it spent a relative high capital expenses as shown in Table 1 below.
Table 1: Cash flows of Scientex
Over the last 13 years, it has produced a total FCF of RM689m which it used to invest in profitable investments and paying dividends to shareholders, invest in profitable comanies, and not from your own money (right issues), continued borrowing from banks, or by giving a piece of the business from other private investors (private placement).
Conclusions
Scientex has high revenue and profit growth for the last 12 years. Despite the very high growth, It still have positive and reasonable good FCF every year. It even earns more cash than its accounting profit every year. After spending huge amount of capital expenses and acquiring other companies in the same business, and as a result, it earns more profit and hard cash.
Scientex appears to be the kind of company investors should look out for investing for the long term; A regional and world market leader, high return on capitals, a cash cow, but trading at reasonable price, or may be even cheap price.
For those who wants to learn about investing in cash cows and understand what I have been talking about buying good companies at good price as investment for the long-term, please contact me at
The last train is moving. You still can jump on board now.
K C Chong
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Discussions
6 people like this. Showing 15 of 15 comments
I like the way Scientx going about their businesses , though property section makes much of the income compared with plastics but atlas , the mix is to their advantage ; making more monies than ever ! Who said , property sector is bad ? the point is they are focusing on building low cost , medium cost and affordable housing contrary to the other property developers . even though making less margin along the way but nevertheless contributing more to the overall profit . Like it or not , this co ever since its inception , never once making a loss. this is a real feat in Bursa. Its price had once been in the 1.50 level but now already 7.40...and is improving every year ! It will be a time it may hit more than RM 10.00 for a near term...I am very confident about that. Forget about the Economic and financial jargons like CFFO and FCF . Even without those knowledge , we can still make a good judgement on Scientx.
06/10/2015 07:33
limayseng
2015-10-06 07:34
Sorry kcchongnz , fcf/ic ,how to count ic(invested capital) actually? I mean from which part we can find the amount ? Pls guide ^^ thanks
2015-10-06 07:52
Posted by fattycat > Oct 6, 2015 07:52 AM | Report Abuse
Sorry kcchongnz , fcf/ic ,how to count ic(invested capital) actually? I mean from which part we can find the amount ? Pls guide ^^ thanks
You can't "find the amount" anywhere. You have to estimate it. Here is a way of estimating IC.
IC = Fixed Assets + Net Working Capital
2015-10-06 08:40
ANOTHER EXCELLENT WRITE UP BY KCCHONGNZ.
Scientex was recommended Dr. Neoh Soon Kean in his monthly digest when it was around Rm1.70. At that time I tought property sales in Iskandar was no good. To my surprise I discovered the modus operandi of Scientex as a par excellence developer. By then price has already shot past Rm6.00
What are the strengths of Scientex as a property player?
I think these reasons stand out:
1. Scietex knows the market very well. In Tmn Scientex, Pasir Gudang they only built affordable 2 Storey medium cost houses 16x60 feet which sells for around rm120k. These were well received by the market. As property prices boomed they raised price gradually to Rm138k, then Rm168k. At the good response they added half a floor to make it 2 1/2 Storey houses and raised price to RM228K, THEN TO RM248K AND FUTHER TO RM288K. THE GRADUAL INCREASE IN PRICES WITH ADDED VALUE LIKE MORE FEATURES AND BALCONIES DREW IN INCREASING SALES, TRANSLATING INTO HIGHER PROFITS OVERALL.
I noticed that SCIENTEX also used cement bricks instead of red clay bricks for all their houses. These cement bricks retail at half the price a piece only 24 cents compared to red clay bricks at 48 cents a piece.
Scientex went further and manufactured their own cement bricks and further cutting costs to below 12 cents a piece. SO PROFITS EXPLODED UPWARD.
In SKUDAI GELANG PATAH SCIENCTEX COPIED THE WELL KNOWN NAME OF TAMAN MUTIARA RINI BY BOUSTEAD AND CALLED THEIR DEVELOPMENT TMN MUTIARA MAS, TO THE DISPLEASURE OF TMN MUTIARA RINI SALES STAFF.
AND HERE SCIENCE IS BUILDING HIGHER END CLUSTER AND SEMI D HOUSES TO CATER FOR THE MORE AFFLUENT CHINESE POPULATIONS. I FIND THEIR CLUSTER HOUSE DESIGNS TO BE OF SUPERIOR QUALITY. ONLY ECOWORLD CLUSTER HOUSES CAN MATCH THEM IN QUALITY AND DESIGN.
NO WONDER SCIENTEX HOUSES IN TMN MUTIRA MAS SOLD LIKE HOT CAKES.
AS THE FACTORIES OF SENAI AND KULAI BOOMED SCIENTEX STARTED TO BUILD HOUSES IN TMN SCIENTEX, KULAI. 16X60 FEET SELLING FOR AROUND RM300K. These houses were also selling like hot cakes. Lawyer Wang and SB Wong are having SCIENTEX KULAI SALES AND PURCHASE AGREEMENT PILING UP IN THEIR OFFICE.
I think SCIENTEX management is very smart and highly capable of generating more sales in ISKANDAR. I hope to buy some SCIENTEX in a market crash.
Who knows? The days are still early in this special October month. So hmmn?
Just wait and see how?
2015-10-06 09:29
their consumer packaging division going to explode with visible expansion(more then double on 2017 after new factory for BOPP). so you will c the balance between property and manufacturing soon.
2015-10-06 10:30
A better comparison would be to value the property segment of Scientex on a standalone basis vis a vis the other small/mid-cap developers
2015-10-06 12:00
great article. but my sifu said before they are too aggressive. need to be careful
2015-10-06 17:14
Good morning from Calvin Tan in ISKANDAR.
Scientex great success in ISKANDAR‘S Property Sales is due to the total neglect of other property players in providing affordable landed houses around Rm300,000. Every where developers are building 2 storey houses above rm500,000 a unit. And nobody is willing to build any single storey landed property within 20 minutes drive from JB CITY.
Those who build high end condos to maximize profits are now facing very tepid sales while SCIENTEX ALONE IS DOING ROARING BUSINESS.
EVEN THOUGH SCIENTEX HOUSES ARE COMPACT IN SIZE ... 16X60 FEET THEY ARE THE ONLY AVAILABLE ONES IN ISKANDAR RIGHT NOW.
THERE IS A GREAT OPPORTUNITY IN THE SECONDARY MARKET IF YOU CAN GET
SINGLE STOREY HOUSE WITH 3 ROOMS 2 BATHS FOR RM200,000
DOUBLE STOREY TERRACE HOUSE WITH 4 ROOMS 3 BATHS FOR RM300,000
RIGHT NOW IN SHENZHEN PROPERTY PRICES ARE SIZZLING EVEN THOUGH HOUSEPRICES FELL BY 20% IN OTHER PARTS OF CHINA.
SO EXPECT ISKANDAR HOUSE PRICES TO BOOM FOR YEARS TO COME. SCIENTEX‘S
SUCCESS SHOWS THE SECRET TO PROPERTY INVESTMENTS IN ISKANDAR. GO FOR AFFORDABLE MID RANGE LANDED PROPERTIES BETWEEN RM200,000 TO RM400,000
2015-10-07 07:46
Could anyone show me how to calculate the Capital Expenses in the Table 1. I am new to fundamental Analysis. Thank you.
2015-10-07 08:32
Posted by gbk5566 > Oct 7, 2015 08:32 AM | Report Abuse
Could anyone show me how to calculate the Capital Expenses in the Table 1. I am new to fundamental Analysis. Thank you.
Capital expenses are shown in the cash from from investing activities in the cash flow statement.
2015-10-08 07:42
Thank you, Mr. Chong.
I had referred to past year annual report of Scientex from year 2014-2008.
I assumed the "Purchase of property, plant and equipment" from investing activities in the cash flow statement is the Capital Expenses.
YEAR Annual Report Your Table 1
2014 -65,665,000 -101.4 Mil
2013 -53,787,000 -53.8 Mil
2012 -40,922,929 -40.9 Mil
2011 -16,406,971 -16.4 Mil
2010 -24,017,724 -24.0 Mil
2009 -10,975,793 -12.2 Mil
2008 - 9,319,827 -39.0 Mil
From my table above, figures for the year of 2013, 2012, 2011 and 2010 are the same as your table.
Figures for the year of 2014, 2009 and 2008 are different.
Mr. Chong, is there any other amount which I need to take into consideration?
Sorry to trouble you.
Thank you.
2015-10-08 15:39
gbk5566,
The core business of Scientex includes properties and PVC/PP/PE. Hence any investment related to both core business are also considered as capital expenses, not only purchase of PPE. But still interpretation of this is also an art, and not an exact science.
2015-10-08 15:51
Happy New Year KC, appreciate your good job here.
Unfortunately I only bought it at 9.5 after seeing your article and done some own studies recently, hopefully it's still not too late to jump on board.
Cheers~
2016-01-01 17:23
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I would love to buy a company like Scientex, but dislike the fact that property development now contributes the majority of the profit instead of their plastic division. It would be so much more appealing if property is not their core business.
2015-10-06 07:01