KUALA LUMPUR: Scientex Bhd said it will stand to benefit — albeit “slightly” — from the weaker ringgit against the US dollar, going forward. The company saw its net profit growth for the second quarter ended January (2QFY15) dragged down by a foreign exchange (forex) loss of RM9.7 million on a weaker ringgit due to its US-denominated borrowings.
This, according to Scientex (fundamental: 1.7; valuation:2.4) managing director Lim Peng Jin, is because about 70% of sales of its manufacturing division are derived from exports.
Scientex’s core business is in the manufacturing of industrial and consumer packaging products, such as stretch films, lamination base film, biaxially-oriented polypropylene (BOPP) film, barrier film and wicket bags, which it sells locally and exports. Its property development activities are Johor-focused and lean towards affordable housing.
“As a substantial portion of our [manufacturing division] sales are generated in US dollars, we will stand to benefit slightly from a weaker ringgit against the US dollar,” Lim told The Edge Financial Daily in a recent email interview.
However, he said the group does not speculate on forex fluctuations.
“We do not speculate on forex fluctuations, and maintain prudent forex exposure in line with our risk management practices,” he said.
In 2QFY15, Scientex recorded a profit of RM36.05 million, up only 6.29% from 2QFY14’s RM33.92 million, even though its revenue was up 20.7% at RM462.87 million compared with the previous year’s RM383.49 million.
The revenue increase was boosted not only by higher contribution from its packaging products in both the local and export markets, but also by strong progress billing contribution from its property segment.
Kenanga Research, in a note to clients on March 27, said Scientex will be less impacted by the weakening of the ringgit going forward as the company has been reducing its exposure to greenback borrowings. Its US dollar-denominated borrowings stood at 58% in 2QFY15 against 77% in 1Q.
Nevertheless, Kenanga Research maintained an “underperform” call on the counter with a revised sum-of-parts target price of RM5.79 from RM5.49, as it expects manufacturing earnings growth from Scientex’s capacity expansion will only kick in from FY17 onwards, while the outlook for the property segment remains unexciting in the near term.
Last year, Scientex announced a RM300 million capital expenditure (capex) programme, which is slated for completion in 2016 to increase its consumer packaging division’s production capacity.
The capex comprises the expansion of its polyethylene (PE) film capacity to 48,000 tonnes per year, which has just been fully completed, as well as the construction of a new cast polypropylene (CPP) and BOPP plant to reach production capacity of 12,000 tonnes per year and 60,000 tonnes per year, respectively.
Lim told The Edge Financial Daily in his email that the capacity expansion for the CPP and BOPP plant is to cater for the domestic market.
“For CPP and BOPP films, we are targeting import substitute opportunities in Malaysia, where the majority is currently imported from overseas.
“With our expanded capacity, we will be well-poised to provide local packaging players with a viable, cost-effective alternative with shorter delivery time,” he said.
The consumer packaging division, meanwhile, which comprises PE, CPP and BOPP packaging, is to cater for Southeast Asia demand.
“We anticipate higher demand from Southeast Asia [in the near future], where demand for flexible packaging by the food and beverage industry is growing rapidly. We aim to become one of the key material suppliers to packaging players in the region by providing quality products at competitive pricing,” Lim said.
The new CPP and BOPP plants, he said, should commence operations by end-2015 and mid-2016 respectively.
On Scientex’s market expansion plan in the consumer packaging segment, Lim said the company will focus on Southeast Asia, including new markets in Indonesia, the Philippines, and Thailand.
“This comes in addition to existing sales in Malaysia, which we hope to expand further,” Lim said.
The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.
This article first appeared in The Edge Financial Daily, on May 5, 2015.