Last week, we met with the Investor Relations (IR) team of Scientex Berhad and gained further insights into Scientex’s new venture in the US. We see this as good opportunity to expand its footing into the country. Key benefit to Scientex is to diversify export sales away from the saturating Japanese market. Maintain Scientex as Buy with unchanged target price of RM8.50/share.

Venturing into America

In November, Scientex announced that the company has established a new wholly-owned subsidiary called Scientex Phoenix, LLC to set up a new stretch film manufacturing plant in Arizona, USA. According to management, the plant will have a manufacturing capacity of 30k tonnes/annum, boosting the group total capacity to 180k tonnes/annum.

The plant is expected to be completed by end-2017. Assuming a production trial run of 6 months, the plant should commence operations from 2Q18 (or beginning of FY19) onwards. As far as cost is concerned, it is estimated to cost US$25mn (RM106.3mn excluding land cost) for the purchase of land and setting up the plant with 2 production lines. To finance this expansion, the company will use both internally-generated funds and borrowings.

Expanding Within the USA Market

Currently, Scientex is already exporting small volumes of stretch films to the US. Of the total capacity of 150k tonnes/annum, exports to the US account for only 1% while the majority is exported to Japan (90%) or sold in Malaysia (9%). However, exports to the US is expected to grow substantially to 17.5% of the group’s sales mix when the US plant is ready for production.

Our view

Overall, we are neutral on this venture despite our expectation that near-term contribution from the plant could be minimal. We see the establishment of the plant as a testament to long-term commitment to customers in the US and to maintain existing business relationship with existing customers. Even though the expansion would allow Scientex to be closer to its US customers, we opine that the operating environment could be challenging due to: i) high level of competition among local stretch film players, ii) protectionist measures from the USA government in protecting local players, and iii) gestation period for local US market to buy from Scientex.

Forecast

No change to our FY17-18 earnings projections as the plant is expected to start contributing from FY19 onwards. Assuming that Scientex would fund 80% of the establishment cost via borrowings, the group’s net gearing will be little changed at 0.1x for FY17.

Recommendation

We maintain our SOP-valuation of RM8.50/share for Scientex. We continue to like Scientex as the current market environment, where demand is far exceeding the supply, bodes well for the group’s future profit. Maintain Buy.

Source: TA Research - 28 Dec 2016