Scientex seen to gain from stretch film demand, property strategy

This article first appeared in The Edge Financial Daily, on January 18, 2019.
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Scientex Bhd
(Jan 17, RM8.79)
Buy with a target price (TP) of RM10.10:
Under its Vision 2028 strategy, Scientex Bhd aims to hit RM10 billion in revenue by 2028 through organic and merger and acquisition-led expansion, implying a 10-year revenue compound annual growth rate (CAGR) of 14.3%.

Under the 2028 strategy, Scientex will also be building 50,000 units of affordable homes.

It has completed 17,000 units since 1995.

Average utilisation rates for the manufacturing division are expected to grow to 70% to 77% over financial year 2019 to 2021 estimate (FY19-21E) from approximately 66% in FY18.

This is due to the group progressively fills up capacity for its stretch film (US Arizona plant) and custom film biaxially-oriented polypropylene plant to cater to the increased demand for flexible plastic packaging for both the domestic and export markets.

Elsewhere, we expect pressure on manufacturing margins to ease from FY20E on softer resin prices and a higher-margin mix, negated by a stronger ringgit versus the US dollar.

The group’s property launches have been very saleable, thanks to its focus on the affordable housing segment.

In the nearer term, Scientex’s property prospects will be supported by unbilled sales of RM500 million as at 1QFY19

Furthermore, its property prospects will be supported by RM1 billion worth of project launches coming in FY19 (FY18 project launches of RM1.2 billion).

Scientex’s gross development value (GDV) of RM13.5 billion is expected to sustain the group over the next ten years.

We initiate coverage on Scientex with a “buy” rating and TP of RM10.10. Scientex is a Top Five global player in stretch film packaging and a leading developer of affordable homes in Peninsular Malaysia.

We like its impeccable earnings track record and execution, largely attributable to its solid management team and leadership position.

Riding on global demand for stretch films and a successful property strategy, we forecast a FY18-21E earnings per share CAGR of 10.2%.  — Affin Hwang Capital Research, Jan 17