Scientex’s  1QFY15  (Jul)  core  earnings  of  MYR35.5m  met  our expectations.   Maintain  BUY,  with  our  SOP-based  TP  unchanged  at MYR8.64  (26.3%  upside).  We  continue  to like  the  stock for:  i)  its  long-term  earnings  prospects  leveraging  on  its  expansion  strategy  to quadruple its consumer packaging capacity by 2017, ii) relatively sturdy balance sheet, and iii) committed management team.  

Largely in line. 1QFY15 revenue closed at MYR431.1m (+18.2% YoY), driven  by  both its  packaging  arm  (+10.8%  YoY)  as  well  as its  property development  segment  (+46.5%  YoY).  EBIT,  meanwhile,  grew  by  a smaller  15.5%  YoY  to  MYR44.9m  due  to:  i)  higher  depreciation  in tandem  with  its  capacity  expansion,  and  ii)  revised  pricing  under  its packaging  arm  to  increase  market  penetration  to  fully  utilise  its  new capacity. All in,  1QFY15 core earnings of MYR35.5m came in at 19.7% and  19.9%  of  consensus  and  our  full-year  estimates  respectively.  We deem this in line with our expectations, as 2H is seasonally stronger.  

Sturdy balance sheet. Recall that Scientex has proposed to invest over MYR240m  in  capex  over  the  next  two  years  to  quadruple  production capacity  under  its  consumer  packaging  segment  to  120,000  tonnes come 2017 from 54,000 tonnes currently. We continue to believe funding should  not  be  an  issue,  given:  i)  its  relatively  manageable  net  gearing level  of  0.34x  currently,  ii)  operating  cash  flow  of  over  MYR200m  per year,  and  iii)  an  additional  MYR40m  cash  inflow  from  FutChem’s subscription of 5% stake in its consumer packaging arm.

Forecasts  and risks.  With  the  results coming  largely in line,  we  make no  changes  to  our  FY15F-17F  forecasts.  Key  risks  include  a  potential slowdown  in  property  sales  amidst  rising  costs  of  living  and  potential fluctuations in the prices of resin, which is its core production input.

Maintain  BUY.  Scientex’s share price has retraced by over 11%,  in tandem  with  the  recent  market  selldown. We  see  this  as  an  appealing opportunity for investors to accumulate, as we continue to like the stock for:  i)  its  long-term  earnings  prospects  leveraging  on  its  expansion strategy  to  quadruple  its  consumer  packaging  capacity  by  2017,  ii) relatively  sturdy  balance  sheet,  and  iii)  committed  management  team.  Maintain BUY with our SOP-based TP unchanged at MYR8.64.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Scientex makes industrial packaging and has manufacturing facilities in Malaysia and Vietnam. It also has a property development arm, with projects concentrated in Malaysia’s southern region.

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Source: RHB