Highlight Scientex continues aggressive expansion

Highlight Scientex continues aggressive expansion
Business & Markets 2013
Written by Ben Shane Lim of theedgemalaysia.com
Friday, 06 September 2013 19:00

WITH the acquisition of GW Plastics Holdings Bhd earlier this year, Scientex Bhd has leapfrogged its way to become the third largest stretch film manufacturer in the world — just in time for its 45th anniversary.

For the time being, the group is not letting up on its aggressive expansion plans, backed by the projected annual cash flow of about RM200 million from its manufacturing and property arms, including contributions from GW Plastics.

“In the past 10 years, we have averaged a compound annual growth rate (CAGR) of 31% for profit after tax and minority interests and a CAGR of 16% for our revenue,” managing director Lim Peng Jin tells The Edge in an interview.

“Now we are mapping out our plans for the next five years. Given our larger base, it will be hard to sustain the 30% growth rate, but we aim to maintain at least double digit growth,”

Lim and his family controls about 60% of Scientex. The 46-year-old has been with the company founded by his father for the past 22 years, and played a key role in transforming Scientex from a small PVC leather cloth manufacturer into a packaging manufacturer and property developer with RM1 billion in market capitalisation today.

According to Lim, the group currently has two expansion plans in the pipeline.

By the end of the year, it will complete a RM45 million expansion of its stretch film capacity by 26% to 194,000 tonnes a year from 154,000 tonnes at its factory in Pulau Indah. This is on top of the additional 26% tonnage boost from the acquisition of GW Plastics.

The expansion is to accommodate rising demand for the group’s stretch film products. More than 95% of its production is exported.

Lim notes that both raw material costs and selling prices are denominated in US dollars, which means that the group has a natural hedge against the recent foreign exchange fluctuations. Operational costs, however, are still in ringgit, so the group should see a positive impact to its bottom line if the weak ringgit persists.

In terms of revenue, stretch film contributed RM147.8 million in the third quarter ended April 30, or 43% of the group’s total revenue.

Scientex has also announced a RM50 million expansion of its consumer packaging arm which contributed RM59.7 million or 17% of revenue in the third quarter. Under this segment, the group is the largest supplier of bread packaging in Asia.

The first of the group’s five new blown film extrusion machines will arrive next month, says Lim. This should help ease the bottleneck at its consumer packaging division. In total, two small blowers and five large ones will be delivered by July next year, effectively increasing annual capacity by 50% to 51,000 tonnes.

“The acquisition of GW was concluded in January and the businesses were consolidated in the first two months. By April, however, we realised that we needed to expand because we could not keep up with orders [for consumer packaging] and were falling behind delivery schedules,” says Lim.

The reason for the expansion is because the current capacity is almost fully utilised, and the new capacity will be easily taken up, he says.

Beyond this round of expansion, there are also plans to expand the capacity at its consumer packaging division by another 50% towards the end of next year, says Lim. The group already has 28 acres in Rawang near the existing factory that can be used to accommodate the expansion, he notes.

Riding its strong operating cash flow, the group will be able to afford these expansion plans despite its 30% dividend policy and the fact that it had just spent RM283.2 million early this year to acquire GW Plastics, Lim says.

“In the third quarter, including contribution from GW Plastics, we achieved an operating cash flow of RM50 million. This will be able to fund our expansion plans. Even after acquiring GW Plastics, our net gearing is only at 0.49 times or RM254 million in net borrowings. In simple terms, it means that we can pay off our borrowings in five quarters,” he explains.

Meanwhile, on the property development front, Lim says, “We still have almost 1,000 acres to develop, so there is no urgency at the moment to acquire more land. Of course, we are still on the lookout for good opportunities if they arise,” he says.

The group’s current landbank has an outstanding estimated gross development value (GDV) of RM4.6 billion. With developments worth RM500 million in GDV carried out each year, the landbank will last 10 years, he explains.

“We are quite conservative, so we don’t chase high prices. We acquired the bulk of our landbank cheap during the Lehman crisis of 2008 and before the Johor property boom. During the crisis, we acquired land in Melaka, Skudai and Senai,” he says.

In fact, none of the group’s land cost exceeds RM10 psf, he reveals, with its land in Kulai costing RM3.50 psf, Senai about RM6 psf, and Skudai about RM9 psf.

Last year, the group launched 15 projects and plans to launch another 13 over the next year, with an estimated GDV of RM600 million.

In Pasir Gudang and Kulai, the group has been successful in developing double-storey affordable housing with a nearly 100% occupancy rate, says Lim.

The group’s flagship development will be in Skudai, where it has launched its maiden high-rise project, the Garden Residences in Taman Mutiara Mas.

In Skudai alone, the group has ongoing and newly launched projects worth RM456 million in GDV. These projects have a 75% take-up rate, excluding the bumiputera units that are pending release.

Over in Senai, the group is developing factories targeted for light industry and small medium enterprises. The project has a GDV of RM100 million.

At its close last Thursday, Scientex was trading at RM4.73, valuing the group at 9.4 times forward earnings. In comparison, the group’s historic PER averaged 13.8 times in FY2012.


This story first appeared in The Edge Malaysia Weekly Edition, on September 2 - September 8, 2013.