We initiate coverage on Scientex (SCI) with a BUY call and MYR6.36 FV. We expect it  to register FY14F-16F earnings of MYR143-192m, implying a  10.2%  3-year CAGR.  We like SCI for its: i)  fast-expanding  plastic  film manufacturing  segment,  ii)  reputable  brand  name  in  southern Malaysia’s property market, and iii) committed management team under the founding Lim family, which now holds a 60% stake.

• Brief background.  SCI  is involved in  plastic  film  manufacturing as well as property development.  The group  manufactures resin-based film for the logistics,  food  &  beverage (F&B)  and  fast-moving consumer goods (FMCG)  segments,  while  its  property  development  arm  is  mostly concentrated in Johor, where it was founded in 1968.
• Film  manufacturing.  SCI’s  manufacturing  division  contributed  79%  to topline  and 54%  of its  consolidated EBITDA  in 1QFY14. The group  has 10 production facilities in Malaysia and Vietnam. Its key products include stretch film, consumer film and strapping bands. Of note,  SCI’s  stretch film  business  has  an  annual  production  capacity  of  194,000  tonnes, making  it  the  world’s  third-largest  stretch  film  producer.  Overall,  the group  exports  over  75%  of  its  manufactured  products  to  countries  like Japan, South Korea, Taiwan, Russia and Australia.
• Niche  property  developer.  SCI’s  property  development  division  is currently  sitting  on an  undeveloped  landbank of  990  acres  with  a  total remaining GDV of MYR4.4bn to be developed over the next 10 years. Currently, it has ongoing developments  in Pasir Gudang, Kulai, Skudai and  Senai  (all in Johor)  as well as Ayer Keroh, Melaka.  Management is looking at new launches with a total GDV  of  MYR600m in FY14.  As at Oct 2013, unbilled sales stood at MYR406.9m.
• Earnings  outlook.  Moving  forward,  SCI’s  growth  will  be driven  by  the expansion  of  its  manufacturing  production  lines  as  well  as  sustainable growth  in  its  property  sales.  Pegging  a  12x  CY14F  P/E  to  its manufacturing segment and ascribing a 30% discount to the RNAV of its property segment, we arrive at our MYR6.36 FV. We initiate coverage on this stock with a BUY call.

Corporate  background.  Established  in  1968,  SCI  was  previously  involved  in  the production of  polyvinyl  chloride  (PVC) leather cloth as well as  sheeting for industrial and  consumer  products.  Today,  the  group  is  a  leading  industrial  packaging manufacturer  in  Asia  and  is  among  the  world’s top  three producers  of  stretch  film, with an annual  production  capacity of 194,000  tonnes.  SCI  diversified into property development  in  1995, with its  existing projects  now  predominantly centred in Johor and Melaka.  The group’s manufacturing  division contributed 79%  of its  topline and 54% of consolidated EBITDA in 1QFY14, while the remainder  was from its  property division.

Founding  family  holds  60%  stake.  Management  is  currently  led  by  executive deputy  chairman  Lim  Teck  Meng,  the  founder  of  the  company.  He  is  currently assisted by his son Lim Peng Jin,  who is the group MD and a chemical engineer  by training. Peng Jin  has been with  SCI  for the last 20 years.  Currently, the founding family collectively owns a 60% stake in the group. Listed on the Main Market of Bursa Malaysia in Feb 1990, SCI’s market capitalisation has increased by more than 10-fold over the last 23 years to MYR1.24bn currently.

Source: RHB