Scientex’s  FY14  core  earnings  of  MYR146.30m  met  our  expectations. We raise our FV to MYR8.64 (from MYR7.19)  as we peg  a  revised  CY15 P/E  of  15x  (from  12x)  to  the  packaging  division,  which  better  reflects growth  prospects.  We  maintain  BUY  as  our  new  FV  implies  a  24.3% upside.  Management  unveiled  its  expansion  strategy  to  quadruple consumer packaging capacity to 120,000 tonnes come  2017. This could propel earnings growth in the foreseeable future.

Largely in line.  Scientex’s FY14 revenue of MYR1.59bn  closed higher by 29.4% y-o-y, driven by both its packaging arm (+29.8% y-o-y) as well as its  property development segment (+28.4% y-o-y).  EBIT, meanwhile,grew  by  a  smaller  17.9%  y-o-y  to  MYR181.40m  due  to:  i)  higherdepreciation  in  tandem  with  its  capacity  expansion,  and  ii)  a  marginal uptick in  opex.  All in,  FY14  core earnings  of MYR146.30m were  in line with expectations, at 103.3% and 102.1% of consensus and our full-year estimates respectively. 4QFY14 numbers were generally higher y-o-y on better showing from both its core divisions. 

Declares DPS of  13.0 sen. Management declared  a final DPS of 13.0 sen,  bringing  its  FY14  DPS  to  21.0  sen.  This  translates  into  a  decent payout  ratio  of  31.3%.  Although  capital  investment  stands  at  over MYR240m over the next two years, management reiterated  its dividend commitment of a minimum 30% payout.

Forecasts  and  risks.  Taking  into  account  the  group’s  proposed expansion  plans  for  its  consumer  packaging  arm,  we  upgrade  our FY15F-16F  EPS  estimates  by  2-6%.  Key  risks  include  a  potential slowdown  in  property  sales  amidst  rising  costs  of  living  and  potential fluctuations in prices of resin, which is its core production input.

Maintain  BUY.  We  came  out  of  the  briefing  feeling  positive  on  its medium-term     earnings prospects,  leveraging  on  its expansion strategy to  quadruple  its  consumer  packaging  capacity  by  2017.  We  also  see positives  in  its  partnership  with  Japan’s  Futamura  Chemical  to  help expand  its  biaxially  oriented  polypropylene  (BOPP)  film   presence.  As such, we maintain our BUY call. We also increase   our SOP-based FV to MYR8.64  (from  MYR7.19)  following  our  earnings  revision,  and  as  we peg  a  revised  CY15  P/E  of  15x  (from  12x)  to  its  packaging  division, which  better  reflects  its  earnings  growth prospects  at  a  CAGR  of 20% over the next three years.

Briefing Highlights

Details  on  partnership.  We  attended  the  official  signing  ceremony  for  the  equity participation in  Scientex’s consumer packaging arm  Scientex Great Wall  SB  (SGW)by Futamura Chemical Company Ltd (FutChem) held at Shangri-La Hotel, KL. Based on the signed agreement, FutChem  will inject MYR40m capital into SGW. In return, the  Japanese  group  will  hold  a  5%  stake  in  SGW.  On  a  side  note,  FutChem  is entitled to purchase up to 20% stake in SGW over next five years ,  with pricing to be determined later on. 

New BOPP film plant.  As part of the agreement, SGW will build a  new  BOPP  film manufacturing  plant  in  Pulau  Indah,  Port  Klang  at  an  estimated  capital  outlay  of MYR170m.  The  plant  will  have  an  annual  production  capacity  of  60,000  tonnes  of BOPP  films  upon  completion  by  end-2016.  Upon  commencement  of  the  plant, FutChem will be allocated 30% of the production capacity for sale and distribution in Japan. The  remaining 70% will be marketed in Malaysia and other South-East Asiancountries by Scientex. 

Penetrating  into  new  segment.  In  addition,  SGW  has  announced  its  intention  topenetrate into the cast polypropylene (CPP) film, with an initial production capacity of 12,000  tonnes.  This new setup will cost an estimated MYR50m and we expect full commercial production to commence by 4QCY15. 

Consumer packaging to propel growth.  With i) the proposed expansion of BOPP film,  ii)  the  setting  up  of  its  CPP  division,  and  iii) the  ongoing  expansion  under  its polyethylene  (PE) film,  which is set to be completed by Feb 2015,  Scientex’s annual production capacity  under its consumer packaging segment will increase to 120,000 tonnes  come  2017  from  30,000  tonnes  currently.  Based  on  our  estimates, this  will bump  up  its  segmental  revenue  contribution  to  over  MYR1bn  by  FY18F  from MYR295.1m in FY14. 

Capex allocation of MYR240m.  In a nutshell, its proposed expansion plans would require  capital  investment  of  over  MYR240m  over  the  next  two  years.  We  believe funding should not be an issue given: i) its relatively manageable net gearing level of 0.36x currently, ii) annual operating cash flow of over MYR200m per year,  and iii) an additional MYR40m cash inflow from FutChem’s subscription of 5% stake in SGW. 

Continues  to  focus  on  affordable  homes.  Moving  onto  its  property  segment, Scientex  booked  in  new  property  sales  of  MYR470m  in  FY14  vis-à-vis  total  new launches of MYR590m during the year. Management guided that  the  majority of the new  sales consists of affordable residential properties in Pasir Gudang, Senai, and Kulai in Johor. Unbilled sales amounted to  MYR537.4m as of end-July. This,  in our view, will likely last the company over a year, given that its FY14 recognised revenue under  its  property  arm  registered  MYR398.3m.  Management  is  looking  at  new launches with GDV of MYR550m per year  for FY15 and FY16. Its existing landbank now stands at 896 acres with outstanding GDV of over MYR4.3bn. 

Embarking on next phase of growth.  Overall, we came out of  the briefing feeling positive  on  the  group’s  medium-term  prospects.  On  its  manufacturing  division,  we find positives  in management embarking on  the  next phase of growth to expand its presence within the relatively better-yielding consumer packaging segment. Although we  see  minority  leakages  via  FutChem’s  5%  stake  (or  as  much  as  20%  should FutChem  fully  subscribes  for  its  entitlement)  in  SGW,  having  the  Japanese  group onboard would help to shorten the learning curve given that Scientex is relatively new to the consumer packaging industry. Moreover, FutChem’s acquisition  of a 5% stake at  MYR40m  values  SGW  at  MYR800m  in  entirety.  Based  on  our  estimates,  this implies FY14 P/E of over 40x  or forward P/E of 11x-12x, which we deem fair,  upon completion  of  all  the  proposed  expansion.  On  the  other  hand,  we  see  a  relatively stable income stream from its property development arm as the group continues to focus  on  affordable  housing  projects  over  the  near  term ,  in  view  of  the  cautious sentiment in the premium home market.

Source: RHB