Investment Highlights

• We maintain our BUY call, forecasts and fair value of RM12.69/share for Scientex based on sum-of-parts (SOP) valuation (Exhibit 3). We peg its manufacturing segment to an FY22F P/E of 18x, at a premium compared to its peer stretch film makers’ average forward PE of 12.5x. This is 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).
• Scientex’s 1QFY21 net profit of RM92.5mil came in at only 20% of both our full-year forecast and full-year consensus. However, we consider the results within expectations as we expect stronger quarters ahead due to better sales performance from its property division as the domestic economy moves on from the Covid-19 pandemic.
• Scientex’s 1QFY21 net profit grew 14% YoY, driven largely by the manufacturing division. The division’s EBIT surged by a whopping 24% thanks largely to an improved EBIT margin of 11.7% (vs. 8.5% previously) – arising possibly from: (1) a better product mix that was skewed towards the downstream high-margin printing and lamination products from 61.9%-owned Daibochi; and (2) improved efficiency stemming from reduced wastage, better inventory controls, customized solutions and integration within its operating units.
• Scientex’s property development unit registered an 8% YoY decline in EBIT to RM58.2mil in 1QFY21 due to the softer economic conditions attributed to the Covid-19 pandemic. We gather that total new launches stood at a GDV of RM350mil in 1QFY21, with a strong take-up rate of more than 80%.
• We expect the unit’s performance to improve in coming quarters, driven by: (1) progress billings from unbilled sales (that stood at RM760mil as at end-Oct 2020); and (2) RM1.6bil new launches in FY21F, comprising largely of 6,000 units of affordable housing units (with an average price of c.RM267K/unit) in Pulai, Johor and Durian Tunggal, Melaka. In our earnings forecasts, we conservatively assume FY21F new launches of only RM1.3bil in GDV.We continue to like Scientex for: (1) the strong prospects of the packaging industry due to consumer spending, a shift 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 - 18 Dec 2020