This article first appeared in The Edge Malaysia Weekly on January 31, 2022 - February 6, 2022

INSATIABLE — that sums up Scientex Bhd’s appetite for acquisitions. Over the last eight years, the flexible plastic packaging manufacturer has gone on a buying spree, acquiring six companies including Daibochi Bhd. And in places where it hasn’t made any acquisitions, notably Vietnam, Myanmar and the US, it has established its own operations.

Its managing director and CEO Lim Peng Jin has made it clear that the company has not come to the end of its acquisition trail yet, despite the Covid-19 pandemic slowing down its pace of mergers and acquisitions (M&A) over the past two years.

“We couldn’t travel due to the pandemic, which makes it extremely difficult [to negotiate an acquisition]. So, we were more focused on organic growth in the last two years. Moving forward, we will continue to explore opportunities in industrial and consumer packaging,” he tells The Edge in an interview.

Despite the challenging operating conditions brought on by the pandemic, the group reported a net profit growth of 17.2% year on year to RM457.23 million for its financial year ended July 31, 2021 (FY2021). Revenue reached RM3.66 billion, up 3.9% from FY2020.

Scientex has its eye on the local and Southeast Asian markets to capitalise on a growing Asia-Pacific plastic packaging market that is expected to be worth US$128 billion by end-2024 from US$93 billion in 2019, according to data provided by Frost & Sullivan.

On whether the group will announce a new acquisition this year, Lim says he hopes so. “But I hope to be able to travel first. Either a local or regional acquisition is possible.”

He adds that he has been frustrated by the travel restrictions imposed to contain the spread of Covid-19. It is easy to understand why. Prior to the pandemic, he would take 30 to 50 overseas trips a year, or more than two trips per month.

“Since I joined the company in 1991, I have been travelling across the world, meeting people, doing business and learning along the way. But in the last two years, we could only conduct meetings via Zoom,” says Lim.

The group is expected to finance any proposed deal with a combination of internal funds and bank borrowings, he says. It helps that the group’s gearing ratio is still at a manageable level.

Scientex had RM243.31 million in cash and total borrowings of RM1.12 billion at end-July 2021, putting its net gearing at 0.3 times. Its net operating cash flow stood at RM699.6 million in FY2021.

Lim notes that the group’s strategy of doubling its net profit and revenue as well as its production capacity every five years hasn’t changed since his last interview with The Edge in October 2018, as it moves ahead with its Vision 2028 strategy. The ultimate goal of that vision is to hit RM10 billion in revenue by 2028 through organic and M&A-led expansion.

The 54-year-old, who has been at the helm of the group since 2001, is responsible for this strategy. He is a chemical engineer by profession and has been with Scientex since 1991.

His elder brother, Lim Peng Cheong, who is executive chairman of Malacca Securities Sdn Bhd, is also a director and major shareholder of Scientex. The founding Lim family collectively owned 55.8% of the group as at Oct 13, 2021.

Over the past decade, Scientex’s revenue has more than quadrupled while its net profit has grown nearly six times over. Currently, the group’s goal is to more than double its FY2019 net profit and revenue of RM333.7 million and RM3.25 billion respectively by FY2023.

According to Bloomberg’s consensus estimates, the group is expected to post a net profit of RM501.33 million in FY2022 and RM579.8 million in FY2023. This works out to a forward price-earnings ratio (PER) of 14.18 times and 12.116 times for FY2022 and FY2023 respectively.

Scientex’s share price has skyrocketed 1,346% over the past decade and surged 133% since Covid-19 forced the world into lockdowns in March 2020. The stock closed at RM4.55 last Thursday, giving the company a market capitalisation of RM7.06 billion.

Suppose an investor bought 1,000 Scientex shares on Jan 14, 2011, at 33 sen apiece and sold them at RM4.55 last Thursday, he or she could have realised a nice profit of RM4,220. That excludes regular dividend payouts of at least 30% of the company’s annual net profit, as well as bonus shares.

The nine sen dividend per share for FY2021 works out to a yield of 1.98% based on last Thursday’s closing price.

Scientex expects its growth momentum to continue this fiscal year even though shipping challenges and rising raw material costs are poised to drive the average selling price (ASP) of its plastic packaging products higher.

“Currently, Scientex’s ASP of transparent stretch film ranges from RM7 to RM8 per kg while that of printed and metalised film is about RM14 to RM15 per kg and bags, RM20 to RM30 per pack. We see the ASP growing further this year because of rising raw material prices. We also expect the ASP to increase as we produce more value-added products,” says Lim.

While the group is used to the price fluctuations of raw materials such as resins, polymers and solvents, it is difficult to predict freight costs, which have gone through the roof in recent years, “because we don’t know how long this will last”, he says.

“I have never seen this before. It is not only the cost but also the difficulty in getting [our shipment] to the desired location. This is a global problem,” he adds.

“But it has impacted our [packaging segment’s] results in the last two fiscal quarters [as the company cannot easily pass on the costs]. That is because the increase is not 20% or 30%; freight rates have surged about five times.”

Ocean freight rates are expected to remain elevated for the foreseeable future due to pandemic-induced imbalances in supply and demand, tight container capacity and port congestion.

Like its counterparts in the manufacturing and plantation sectors, labour shortage is a challenge for Scientex. On its part, it has invested in automation across its manufacturing plants to reduce its reliance on human labour.

“While we believe that is the way to go, it is a long-term [solution]. We are trying hard to expand our local workforce, but we still need to recruit foreign workers because we are expanding very fast,” says Lim.

He says its labour shortage is currently “manageable”. Foreign workers now account for less than 25% of its 3,700 employees, down from as high as 40% previously.

However, the group wants to hire 200 to 300 more workers in line with its expansion plan. It also relies on its plants in Vietnam and Myanmar for labour-intensive jobs.

Lim notes that the pandemic has made the labour shortage even worse at its stretch film facility in Arizona, the US, as its expatriate employees had to return to their home countries and were unable to travel to the US since 2020. “We had to rely on Zoom meetings to communicate. So, it was not efficient. Today, the plant is only running at about 30% capacity.”

The Arizona plant began operations in January 2018 and served as a springboard for Scientex to tap a readily available market in the US.

“With the spot rate for a 40ft container from Malaysia to the US increasing to about US$20,000, from US$3,000 to US$4,000 previously, we are quite excited about our US factory,” says Lim.

“We started to ramp up production last month and are bringing in new workers. We also sent some expatriates there to help. We are expecting the plant’s capacity to climb to about 60% to 70% in one year.”

Lim says the group will spend RM1 billion on capital expenditure (capex) in FY2022, of which RM800 million will be used to grow its land bank across Peninsular Malaysia and RM200 million for packaging machinery. In the last fiscal year, it allocated RM700 million for capex.

The group has set FY2023 as its next milestone in terms of its ambition to double up every five years. It aspires to reach sales of 400,000 tonnes per year in its packaging division and develop 8,000 affordable homes a year in its property development division by then.

Last year, the production of stretch and custom film and speciality products at its 17 manufacturing plants — 14 in Malaysia and one each in the US, Myanmar and Vietnam — came to 280,000 tonnes. Meanwhile, 3,766 affordable homes were built in 2021.

“While it is not easy to double up every five years, we are continuing our ‘To Double Up Every Five Years’ vision. But how far we can achieve it depends very much on the market environment,” says Lim.

The packaging segment made up 68% of Scientex’s revenue in FY2021, with the property development segment contributing the remaining 32%. About 70% of its packaging revenue is derived from exports to more than 60 countries. Lim expects this revenue composition to continue for the next two years.

Meanwhile, he dismissed the possibility of Scientex spinning off its property development business and injecting it into listed Daibochi, which has been renamed Scientex Packaging (Ayer Keroh) Bhd.

Scientex had failed in its attempt to privatise Daibochi due to a poor take-up of its mandatory general offer in November 2021, garnering only 71.9% equity interest when it needed at least 90% by the end of the offer period to privatise the company. Daibochi will continue to focus on the packaging business.

Lim believes the twin core business model, targeting the robust packaging market and strong affordable homes demand, is working well for the group. “We don’t see any problem in having two businesses in one listed company. We have proved [that it works well] over the past 20 years,” he says.

“If you look at our financial results, we continue to grow each year. Prior to 2018, we invested big in packaging through acquisitions and expansions. For the past two years, we focused on acquiring land bank amid the slowdown in the property market. I think this is a good [business] model.

“Of course from an investor’s point of view, some may not be able to accept it. We have no control over investors who want to rethink our model, but we think we have built quite a lot of value [for shareholders].”

And the outlook for the group remains bright.

According to Lim, the average per capita plastic consumption in developed countries is 100kg per year — five times more than in Southeast Asian countries at 21kg per year. And if the industry in which it operates is pressured by a shift towards sustainability and environmentally friendly materials, the group will not have any issues as it has been developing recyclable monolaminate packaging over the last few years.

“This is in line with environmental, social and governance (ESG) concerns. All the big customers are committed to using monopolymer or recycled plastic packaging by 2025 or 2030,” he says.

“On our part, we have set up innovation centres to develop sustainable products that are wholly recyclable, biodegradable. All these efforts will also create a new business opportunity for us to grow. We work with our raw material suppliers to try all the new materials, as well as our customers, who will test whether these are okay or not.”

Lim says the rising cost of construction materials such as steel, copper and aluminium pose a challenge to its property development segment. It has seen raw material costs rise between 10% and 30% from pre-pandemic levels.

This segment is also grappling with labour shortage, but it has managed this by using the Industrial Building System (IBS) construction technique.

“The rising costs have an impact on us, but it is still manageable. Our [property] business is still growing,” he says.

“Of course, if the government eases its policy on foreign workers, it will help us. I believe in a bigger picture that the country still needs foreign workers. We cannot stop depending on them overnight.

“The government needs to give industry players some time to find solutions. Even if you talk about Industry 4.0 robotic processes, it takes time [to replace human workers].”

In the meantime, Scientex will try to absorb the cost increases rather than pass it on to house buyers. This is thanks to the company’s aggressive land bank acquisitions over the past few years amid the slowdown in the property market, which has allowed it to take advantage of lower land prices.

Scientex made its foray into property development in 1995 and has steadily expanded its presence northwards from Johor to include Melaka, Negeri Sembilan, Selangor, Perak, Penang and Kedah. Its total land bank currently stands at 7,448 acres.

The group has lined up RM2 billion worth of projects for FY2022, up from RM1.5 billion in gross development value (GDV) launched in FY2021. Its ongoing and future developments stand at RM31.4 billion in GDV, which will sustain the group for more than 10 years.

Under its Vision 2028 strategy, Scientex targets to build 50,000 affordable homes by 2028. To date, the group has delivered 25,786 homes, of which more than 70% are priced below RM300,000.

“I believe the country still has a lot of demand for affordable homes, priced at RM300,000 and below,” says Lim. “In 2018, I calculated that if we can build 3,500 units per year, we can reach the 50,000-unit target by 2028. We are doubling our target to 8,000 units per year and, thus, we can probably achieve the 50,000-unit target earlier — maybe by 2026 or 2027.”

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