Investment Highlights

• We maintain our BUY call and forecasts, but increase our fair value by 18% to RM12.69/share (from RM10.74/share previously) for Scientex based on sum-of-parts (SOP) valuation (Exhibit 1). We now peg its manufacturing segment to an FY22F PE of 18x (from 15x), at a premium compared to its peer stretch film makers’ average forward PE of 12.5x, to reflect its higher EPS growth rates of 21.6% and 13.2% in FY21–22F (vs. a weighted average of about 10% annually for its global peers).

• Our valuation upgrade is premised upon:
  
  1. The steep increase in Scientex’s market value since our coverage initiation on 17 Sep 2020, i.e. by a whopping 22% to RM5.6bil from RM4.6bil in just slightly more than two weeks (in part, we believe, also driven by investors’ excitement over the bonus and free warrant issues proposed on 18 Sept 2020). Scientex’s higher market value makes it a lot more investible to large institutional investors, prompting us to raise our target forward PE for its manufacturing segment to 18x (from 15x); and
  
  2. It is also a reflection of earnings potential from some 202 acres of landbank in Pulai under acquisition (announced on 21 Sept 2020). Based on our estimates (using Sceintex’s existing Pulai Mutiara project as a guide), the land should fetch a GDV of RM1.6bil, translating to a net present value (NPV) of RM265mil assuming a net margin of 24%.

• We continue to like Scientex for: (1) the strong prospects of the packaging industry as consumer spending shifts to on-the-go food and beverages due to a hectic lifestyle and higher food safety standards; (2) its above-trend earnings growth rates of 21.6% and 13.2% for FY21–22F (vs. a weighted average of about 10% annually for its global peers) due to extensive R&D, cost efficiency initiatives and an M&A pipeline; and (3) a robust property development business despite the soft market in general thanks to its right focus on predominantly landed affordable residential units in secondary suburbs.

• At about 12x forward earnings in its entirety, we think that this home-grown regional/global plastic packaging player is highly compelling given its strong foothold in a consumer-fuelled sector.

Source: AmInvest Research - 5 Oct 2020