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This article first appeared in The Edge Financial Daily on January 23, 2020

Scientex Bhd
(Jan 22, RM9.23)
Maintain buy with an unchanged target price (TP) of RM10.67:
The 7% retracement of Scientex Bhd share price from the recent peak provides an excellent opportunity to accumulate. Market conditions remain favourable for Scientex to beat consensus earnings expectations: i) plastic resin prices are low; ii) Scientex is the first mover in launching monolamination packaging in Malaysia for its manufacturing division; and iii) its property division has high unbilled sales and strong take-up rates.

Since the fourth quarter of financial year ended July 31, 2019 (4QFY19), Scientex’s manufacturing contributions and margins have achieved a marked improvement, primarily attributable to falling resin prices. Based on our channel checks, resin prices have continued to fall (down 6%) in recent weeks throughout November 2019 - January 2020, indicating sustainable stellar performance at Scientex’s manufacturing segment. Together with: i) stronger utilisation rate across manufacturing plants; and ii) consolidation of newly acquired companies, we are expecting FY20 manufacturing revenue to improve 12% year-on-year (y-o-y) while margin for earnings before interest and tax should expand 0.6 percentage points y-o-y to 8%.

A beneficiary of the rising environmental, social and governance trend, Scientex (via subsidiary Diabochi Bhd) is expanding its monolamination packaging production (first launched in 4Q of calendar year 2019) which fits into the food and beverage manufacturing multinational companies’ overarching packaging policy.

The group is expected to reap first-mover advantages, such as higher average selling price (ASP) and order volume. Note that its stretch film is already in compliance with the sustainable packaging standards, and management is in the final stage of developing sustainable custom films and targeting for product commercialisation as soon as 2020.

Scientex has indicated that: i) its property take-up rate remains strong at 70-80% upon launching; and ii) the regulatory approval delays post-May 2018 general election that have negatively delayed revenue recognition have normalised. We anticipate robust demand for Scientex’s affordable housing, which has more than 60% of its landed property units priced at below RM200,000.

Scientex is on track to achieve a utilisation rate of approximately 70% in FY20 (from 65% in FY19) primarily driven by: i) full-year contributions from Daibochi and Mega Printing & Packaging Sdn Bhd; and ii) smooth ramp-up at the biaxially oriented polypropylene (BOPP) plant and stretch film plant in Arizona.

Scientex’s manufacturing margins did not show direct correlation with resin prices as it has in the past when it was impacted by the penetrative pricing adopted by some of its factories (mainly cast polypropylene and BOPP) post-capacity expansion. However, management alluded that these factories have passed their break-even point and are currently focusing on improving ASP trend, which is reflected in 4QFY19 and 1QFY20 results. While the savings in raw material will be partially passed on for some of the cost-plus products, our sensitivity analysis shows that a 1% drop in resin cost will enhance earnings by 0.4%.

Understandably, Scientex intends to continue to increase its manufacturing capacity (currently 450,000 tonnes) and build 50,000 homes (currently 17,000) by FY28. Management alluded that the group will look further into other mergers and acquisitions for 70% of its manufacturing arm’s expansion with the remaining 30% to be based on organic growth. As a result of its dominant position in the Malaysia packaging market, we are not ruling out the possibility of Scientex acquiring a foreign company moving forward. The few acquisitions in the past have been synergistic, allowing Scientex to access new product segments and clientele.

We maintain “buy” with an unchanged TP of RM10.67, based on 12 times price-earnings ratio forecast for 2020. We foresee a gradual share price recovery on the back of its strong management team and track record, which enables the group to deliver record annual results year after year. — UOB Kay Hian, Jan 22

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