SCIENTX is investing USD25m (RM106m) to set up a new stretch film plant in Arizona, United States. We are neutral on this news in the near term as the impact to earnings is minimal post the plant completion in end CY17, but positive on the long-term prospect as it is expanding its footprint to a brand new and extremely large market abroad. Maintain FY17-18E earnings. Maintain OUTPERFORM and TP of RM7.57.

News. Scientx Berhad (via Scientex Packaging Film Sdn Bhd) has formed a wholly-owned subsidiary, Scientex Phoenix, LLC in Arizona, United States of America (US) and is investing USD25m (RM106m) to set up a new stretch film plant which is expected to be completed by end CY17 (mid-FY18E). The plant is the group’s first stretch film plant overseas with a targeted annual production capacity of 30k MT p.a.

Neutral in the near-term, positive in the long run. We are neutral on the deal as the size of this new plant is relatively small making up 25% of SCIENTX stretch film capacity and 9% of total manufacturing capacity in FY18. Additionally, contribution to earnings is neutral in FY18 (<1%) from 7 months contribution, and could increase to 2% p.a. in FY19. However, we view this as a

long-term positive for SCIENTX as it is penetrating a new market for stretch film since 95% of existing stretch film is currently exported to Japan. Having the new plant located in the US will not only provide SCIENTX a foot in the door to the large and new markets of North, Central and South America, but will allow cost savings for production (from anticipated ample supply of shale gasbased resin) and lower distribution cost to the US market as the company gradually expands its footprint there.

Manufacturing segment continues to expand. The new BOPP plant is set to begin contributions in 1Q17; expansion is underway in the Rawang (+25% to 60k metric tons (MT)/year) and Ipoh (+43% to 24k MT/year) plants which is likely to contribute to 2H17 earnings, while this recent venture to the US will contribute to 2H18, which we have accounted for in our forecast. In the property sector, we expect the on-going sector slowdown to persist due to tighter lending policies and poor market sentiment. However, SCIENTX is targeting to launch more affordable houses (c.90% of total launches) in the next two years which should provide some earnings resiliency.

We maintain FY17-18E earnings of RM292-345m. We make no changes to FY17-18E post accounting for (i) minimal accretion to top line in FY18 (+2%), and (ii) on the back of higher expenditure related to start-up cost and higher financing cost for the new plant. We expect this plant to contribute c.2% to earnings once operations are in full swing in 2-3 years. Net gearing is expected to increase to 0.22-0.06x (from 0.16-0.01x) in FY17-18E.

Reiterate OUTPERFORM and TP of RM7.57 based on Sum-ofParts pegged to CY17E earnings. In the manufacturing segment, we maintain our applied PER of 17.6x, and applied PER of 4.0x for the property segment, in line with small-mid cap property players in a slow market environment. Downside risks to our call include: (i) lower-than-expected crude oil prices, (ii) lower-than-expected property sales forecast or margins. We reiterate our OUTPERFORM call as we expect the drive for manufacturing expansion will support earnings growth and expand margins on stronger product mix.

Source: Kenanga Research - 11 Nov 2016