Scientex scaling new heights

by **Cals** Thu 13 Mar 2014, 17:06

Business & Markets 2014

Written by RHB Research

Thursday, 13 March 2014 09:53

Scientex Bhd
(March 12, RM5.73)
Initiate buy with target price of RM6.36: We like Scientex for its: (i) fast expanding plastic film manufacturing segment; (ii) reputable brand name in Johor’s property market; and (iii) committed management team under the founding Lim family, which now holds a 60% stake in the company.

We expect it to register earnings of RM143 million to RM192 million for financial year 2014 ending July 31 (FY14) to FY16F, implying a 10.2% three-year compound annual growth rate.

Scientex’s manufacturing division contributed 79% to top line and 54% of its consolidated earnings before interest, taxes, depreciation and amortisation (Ebitda) in the first quarter ended Oct 31, 2013 (1QFY14). The group has 10 production facilities in Malaysia and Vietnam. Its key products include stretch film, consumer film and strapping bands. Of note, Scientex’s stretch film business has an annual production capacity of 194,000 tonnes, making it the world’s third largest stretch film producer. The group exports over 75% of its manufactured products to countries like Japan, South Korea, Taiwan, Russia and Australia.

Scientex’s property development division is currently sitting on an undeveloped landbank of 990 acres (401ha) with a total remaining gross development value (GDV) of RM4.4 billion 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 in Melaka. Management is looking at new launches with a total GDV of RM600 million in FY14. As at October 2013, unbilled sales stood at RM406.9 million.

Moving forward, the company’s growth will be driven by the expansion of its manufacturing production lines as well as sustainable growth in its property sales. Pegging a 12 times calendar year 2014 price-earnings ratio to its manufacturing segment and ascribing a 30% discount to the revised net asset value of its property segment, we arrive at our RM6.36 target price. We initiate coverage on this stock with a buy call. — RHB Research, March 12

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This article first appeared in The Edge Financial Daily, on March 13, 2014.