TASecurities INITIATING COVERAGE - I3investorklse.i3investor.com/files/my/ptres/res3706.pdf · INITIATING COVERAGE FBM KLCI: ... large corporation with two core ... was listed in

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TA SecuritiesA Member of the TA Group

MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

INITIATING COVERAGE

FBM KLCI: 1525.80

Scientex Berhad Friday, April 15, 2011

Stretching Its Wings TP: RM3.80 (+50.7%)

Business Summary : Manufacturing Company Major Shareholders (%) : Scientex Holdings (26) : TM Lim Sdn Bhd (8) Recommendation: Buy

: Teck Meng Lim(7) Market Capitalisation (RMmn): RM579.6

Company Website : www.scientex.com.my Current Price: RM2.52

IR Contact : Tan Hong Koon Market/ Sector: Manufacturing

03-55191325 Stock Code: 4731

TA Research Team Coverage [email protected] +603-2072-1277 ext:1635

Key Stock Statistics

YE July 2011F 2012F

EPS (sen) 34.6 46.1

PER (x) 7.3 5.5

Gross div/ share (sen) 10.4 13.8

NTA/share (RM) 2.0 2.4

Book value/ share (RM) 2.0 2.4

Issued capital (mn shares) 230.0 230.0

52 weeks share price range (RM) 2.9 (high) 1.34 (low)

Per Share Data

YE July 2009 2010 2011F 2012F

Book Value (RM) 1.8 1.8 2.0 2.4

Cash (sen) 6.7 10.1 9.0 9.7

Earnings (sen) 16.9 27.1 34.6 46.1

Dividend (sen) 5.0 9.0 10.4 13.8

Payout Ratio 29.5 33.2 30.0 30.0

PER (x) (x) 14.9 9.3 7.3 5.5

P/ Cash Flow (x) 37.5 25.0 28.2 26.0

P/ Book Value (x) 1.4 1.4 1.2 1.1

Dividend Yield (%) 2.0 3.6 4.1 5.5

ROE (%) 9.5 15.0 16.9 19.5

Net Gearing (%) 5.1 10.8 20.7 15.8

P&L Analysis (RM mil)

YE July 2009 2010 2011F 2012F

Revenue 509.7 694.8 823.3 1027.9

Operating Profit 42.5 70.0 88.3 119.0

Depreciation (23.6) (23.6) (27.1) (26.4)

Interest Expenses (1.9) (1.3) 2.2 2.0

Pre-tax Profit 42.1 70.8 92.5 123.0

Effective Tax Rate (%) 8.3 12.2 14.0 14.0

Net Profit 38.9 62.3 79.7 105.9

Operating Margin (%) 8.3 10.1 10.7 11.6

Pre-tax Margin (%) 8.2 10.2 11.2 12.0

Net-Margin (%) 7.6 9.0 9.7 10.3

Share Price relative to the FBM KLCI

Source: Bloomberg

1. Summary

We initiate coverage on Scientex Berhad (Scientex) with a

Buy recommendation. We value Scientex at RM3.80/share

based on Sum-of-parts valuation methodology. Scientex

has two core businesses, ie: manufacturing of packaging

and property business. We are positive on the outlook for

the group mainly due to improving global economic

conditions coupled with positive outlook for the property

sector within the Iskandar Malaysia corridor.

2. Investment Highlights

One of the largest stretch film producers in the world

� Capacity expansion of its manufacturing line will turn

Scientex into one of the biggest five stretch film

producers in the world.

� Export of products to over sixty countries diversifies

earnings and country exposure, hence reducing

earnings volatility.

Profitable property business

� Scientex has sizeable landbank of 1100 acres, located

in Johor and Melaka, which would keep the company

busy for the next 3 years.

� Scientex is one of the beneficiaries of the “My First

Home Scheme’ as the company has been building

affordable homes which priced at RM110k-450k.

TA SecuritiesA Member of the TA Group 15/04/11

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3. Company Background/ Overview

Scientex was incorporated in 1968 and started as a

small manufacturer of polyvinyl chloride (PVC)

leather cloth and sheeting. It has now expanded into a

large corporation with two core businesses, ie:

manufacturing and property. Under its manufacturing

arm, Scientex is involved in industrial packaging,

manufacture of polymer products for automotive

industry and chemicals for food packaging. Scientex

was listed in 1990 under the name Scientex Industries

Berhad and changed its name to Scientex

Incorporated Berhad in 1995 and Scientex Berhad in

2008.

Scientex’s manufacturing division comprises two business

units namely packaging and polymer. The packaging

business unit produces various packaging products

designed for outer, middle and inner packaging

applications ;

i. Outer packaging – Stretch film, Stretch Hood, PP

Strapping Band, HDPE and PP Tying Tape (Raffia)

ii. Middle packaging- Woven Bags, Bulk Bags (FIBC) and

Corrugated Carton Box

iii. Inner packaging –Adhesives, Lamination Film and PVC

Rigid Film

Figure 1: Corporate Structure

Source: Company, TA Research


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Products

Scientex has one of the largest stretch film

production facilities in the Asia Pacific region. In

fact, it is the first in the region which utilize two

cast-line units using in-line winder technology for

hand wrap production. Utilizing the latest advanced

winder technology from Black Clawson USA enables

the company to reduce the time and costs in

downstream production, making the Scientex’s film

products more competitive in the world market.

Scientex produces premium stretch film products

under the brand name ‘Elite’. These products are

half the size of conventional films but possess

comparable holding force, offering up to 50%

savings on consumption and 30% on cost to

consumers. According to management, almost 95%

of its stretch films are dedicated for the export

market to 60 countries. Scientex has the capacity of

producing 120,000MT by FY12 which will put them

the 5th largest stretch film producer in the world.

Figure 2: Elite Stretch Film


Stretch Hood film is a revolutionary way of packing

by wrapping the goods with protective film that can

be applied either for five sided protection or as a

tubular sleeve around the goods within open top

and bottom. With UV stabilizer, most of its products

can be easily stored outdoor from between three to

six months period, providing exceptional savings in

storage costs as compared to warehouse storage.

Stretch Hood is fast gaining acceptance due to its

excellent tear and puncture resistance as well as its

holding force.

Figure 3: Stretch Hood


PP Strapping band is widely used for unitization and

bundling of goods and is produced using the latest extrusion

technology and high quality raw materials which enables

better strength. Its PP Strapping Band range includes, i)Hand

& Regular Grade, ii)Premium-Fully Auto Machine Grade,

iii)Special-Light Weight Band, iv)Heavy Duty Band.

Figure 4: PP Strapping Band


Some of its “niche” manufacturing production include

i)Woven Bag, ii)FIBC Bag (Bulk bags), iii)Carton Box,

iv)Lamination Film, v)PU Adhesives and vi)PVC Rigid Film.

The niche products command higher margin but at much

lower volume.

Figure 5: Other products



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Polymer

The polymer division manufactures and distributes

PVC leather cloth, PVC sheeting, skin materials for

automotive interior and components such as car

seats, instrument panels and door trims. Its

polymer business unit specializes also produces

automotive carpet mats for manufacturers and car

assemblers in the ASEAN countries as well as

Australia, India and Egypt.

Figure 6: Polymer


Figure 7: PVC Leather Cloth


Being the pioneer in the manufacturing of PVC leather cloth

in Malaysia, the polymer business unit is able to produce

products for seat covers that meet OEM specifications in

terms of physical properties, strength, durability and

appearance. Currently, its seat materials are used by

established manufacturers such as Subaru, Nissan, Toyota,

Proton, Perodua, Honda, Suzuki and Yamaha.

Scientex also manufacture tufted carpet mats made for

specifications for both domestic and overseas established

car manufacturers.

Figure 8: Tufted Carpet Mat



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Property

Scientex went into the property business in mid-

90s, starting with Pasir Gudang. Scientex acquired

250 acres land in Kulai in 2007-08 and xxx acres in

Skudai in 2010 to replenish its landbank for future

development.

The introduction of “shear wall design” in the

construction of terrace houses in 2000 has resulted

in the delivery of products on consistent quality,

while reducing manpower and construction time.

Note that Scientex needs approximately 12-months

period to construct and handover properties to its

prospective buyers. Also, the “shear wall design”

has help the group to reduce the wastage of

resources in terms of building materials, targeting

zero construction debris as well as zero open

burning thus contributing to the protection of

environment. This has provided a relatively high

and stable margin of 20-25% for the group.

Figure 9: Pasir Gudang


Figure 10: Upcoming Launch - Emilia


Scientex’s property division is made up of its

flagship development in Pasir Gudang, Johor and a

new up and coming development in Kulai, Johor.

The former, known as Scientex Pasir Gudang,

covers more than 1,100 acres of residential,

commercial and industrial development where over

5,000 units of residential and commercial

properties have been built since 1995.

Figure 12: Kulai


In September 2010, Scientex launched Taman Mutiara Mas

in Skudai, Johor with 100% take-up of the first phase and

86% of the second.

Figure 13: Upcoming launch- Mutiara Mas Service Apmt


Scientex Kulai is the group’s second property project

comprising 250 acres of residential and commercial

development, which has been launched since 2008. This is

in line with the group’s corporate plan to acquire and

develop strategically located prime land in Johor within the

Iskandar Malaysia growth corridor.

Figure 16: Taman Mutiara Mas, Skudai



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The other property development is in Melaka named

Taman Muzaffar Heights, comprising a total of 170 acres,

located in Mukim Bukit Katil, Air Keroh. The land is

strategically sited at an elevated plateau and is served by

a road which is connected to two main roads, Jalan Air

Keroh and Jalan Bukit Beruang. The surrounding vicinity

is well facilitated by amenities such as the Multimedia

University, Higher Education Colleges, Mydin

Hypermarket, Jaya Jusco shopping centre, Pantai Medical

Centre, golf courses, parks, police HQ and the zoo.

Figure 14: Taman Muzaffar Heights in progress


Since its inception, a total of 398 units of Single Storey,

Double Storey Terrace and Semi-Detached houses have

been completed and occupied. 40 units of Semi-Detached

House have been successfully handed over to the

purchasers in December 2009. On 15th December 2009,

Phase M5 was launched. It consists of 35 units of Double

Storey Shop Office and the respond was overwhelming.

Same goes to Phase M3, 62 units of Double Storey

Terrace House which was officially launched in March

2010. All units were sold within a very short period of

time.

Figure 15: Taman Muzaffar Heights


Scientex prices its double-storey link houses at RM120k-

180k per unit, appealing to young families who are

purchasing their first home. As such, we expect the

demand for these properties to remain robust after the

introduction of “My First Home Scheme” by the

government in early-11.

JV with Mitsui Chemicals Tohcello

Scientex has recently entered into an agreement with

Mitsui Chemicals Tohcello for a Solar EVA Project in

Malaysia. The nature of the JV involves the

manufacturing and distributing of ethylene-vinyl (EVA)

encapsulating materials for photovoltaic solar modules.

The plant will be placed in Bukit Rambai Industrial

Estate, Melaka.

Some background on the photovoltaic encapsulants,

would be the evolution of natural energy resources

especially solar power. Encapsulant sheets play an

important role in preventing water and dirt from

infiltrating into solar modules as well as protecting the

cell by softening the hock and vibrations to the cell.

Mitsui Chemicals is the top three producers in the solar

film industry with more than 25 years of technological

know-how whilst Scientex, has the experience in plastic

film and sheet extrusion and an established low cost

volume producer.

We are positive on the JV although contribution to

earnings is only expected to kick in after FY13 since the

construction of the plant will take approximately 12

months. As such, we have not imputed any contribution

from this JV to our estimates.


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4. Board of directors

Tan Sri Dato’ Mohd Sheriff Mohd Kassim, Chairman

Tan Sri Dato’ Mohd Sheriff Mohd Kassim, a Malaysian,

aged 71, is an Independent Non-Executive Director and

Chairman of Scientex Berhad. He was appointed to the

Board in June 2003. He is also the Chairman of the

Board’s Audit Committee, Nomination Committee and

Remuneration Committee. Tan Sri Dato’ Mohd Sheriff

graduated with a Bachelor of Arts (Honours)

Economics degree from University of Malaya in 1963

and a Diploma in Economic Development from Oxford

University, UK in 1969. He served as the Secretary

General of Treasury, Ministry of Finance for 3 years

from 1991-1994 and Managing Director of Khazanah

Nasional Berhad for 9 years (1994-2003).

Lim Teck Meng, Deputy Chairman

Lim Teck Meng, a Malaysian, aged 73 is presently the

Executive Deputy Chairman of Scientex. He is the

founder of the company and was appointed to the

Board as the Managing Director in 1969-2001. He

received his education in Melaka and is a businessman

with more than 40 years experience in the polymer

industry. He also has the experience in trading and

property development. He is the father of Lim Pen

Cheng and Lim Peng Jin, who are also Directors and

major shareholders of Scientex Berhad.

Lim Peng Jin, Managing Director

Lim Peng Jin, a Malaysian, aged 43, is currently the

Managing Director of Scientex Berhad. He was

appointed to the Board in January 1995 as the Group

Executive Director and was re-designated as Managing

Director in 2001. Lim Peng Jin graduated with a

Bachelor of Science (Honours) in Chemical Engineering

from the University of Tokyo, Japan in 1990. He began

his career in chemical industry in Japan before joining

the company in 1991. He had also completed a course in

Programme Management Development at Harvard

University, USA in 1998. He has local and international

working experience in the field of polymer and

chemicals during the early years of his career and is very

hands-on in the business of Scientex Group of

Companies.

5. Industry Landscape/ Overview

We are positive on the outlook of packaging industry

going forward thanks to improving global economies.

Moreover, the exports to more than 60 countries

minimise its single-country risk exposure.

For the property segment, we believe Iskandar Malaysia

has been forming its shape with the inflow of RM62bn

FDI since 2006. Total investment in Iskandar Malaysia is

expected to reach RM124bn by 2025 and this bodes well

to developers with substantial landbank including

Scientex.

We believe Scientex has adopted the right strategy with

the right selling prices, targeting mostly young couples in

areas such as Pasir Gudang and Kulai. Having said that,

Scientex’s Skudai project is within the Iskandar Malaysia

corridor thus focusing on higher-end mixed residential

and commercial properties. Skudai project is expected to

leverage on the existing good infrastructure and

capitalize on close proximity to Singapore. Hence, target

market includes Singaporean with interests for

Malaysian property investment or Malaysians who

commute to work in Singapore.

All in, Scientex’s future growth is expected to be driven

by capacity expansion of its manufacturing business and

robust demand for properties.


Page 8 of 9

Earnings Outlook

In FY10, manufacturing business contributed 78% to

total revenue, totaling RM545mn whilst property

business contributed RM150mn. However at EBIT

level, property business commands 47%, almost half

of its total PBT.

In FY10, Scientex recorded 36% YoY growth revenue

underpinned by margin expansion by 2.p.p. Similar to

most packaging companies, the economic conditions

in 08/09 dampened margins due to rising raw

material costs and lower sales. Comparing against

FY08, revenue and earnings grew by 30%.

The major raw material for manufacturing is mainly

resins, which consists 75-80% to raw materials costs.

Any fluctuation in resin price will not affect Scientex’s

bottomline in a great way as it has pricing power and

will usually pass on the additional costs to customers.

In the event of weakening USD against the ringgit,

note that there is a natural hedge as weakening USD

will reduce USD-denominated exports earnings but

the impact will be mitigated by lower purchases in

USD.

As for the property business, more launches are

planned and are under proposed development. We

expect revenue to increase by 15-38% for FY11-13

period underpinned by high take-up rate and unbilled

sales of RM160mn s as in Feb-11.

Figure 17: Revenue Breakdown

Manufacturing

78%

Property

22%


Management plans to spend approximately RM90mn

capex for the new production line for stretch film

productions for FY11. This additional line is expected to

increase production capacity to 120kMT per annum,

making it the fifth largest stretch film producer in the

world. This line is targeted to be installed in 3QFY11 and

is expected to contribute earnings from FY12 onwards.

In our earnings model, we have assumed the capex to be

financed via RM50mn borrowings. This will likely

increase the group’s net gearing to 20.7% in FY11 from

10.8% in FY10. However, we are not overly concerned

given the strong interest coverage ratio of 40x.

The company is toying with a potential dividend policy in

the near future. Historically, Scientex has been paying

approximately 25-30% in dividends per annum. Thus, we

expect the dividend payout to be in the region of 35-38%

going forward.

Figure 18: EBIT breakdown

Manufacturing

53%Property

47%



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Figure 19: Revenue and Pretax Margin

0%

2%

4%

6%

8%

10%

12%

14%

0

200

400

600

800

1000

1200

1400

2006 2007 2008 2009 2010 2011F 2012F 2013F

RM

'mn

Revenue Pretax margin


Figure 20: Resin price movement

550

750

950

1,150

1,350

1,550

1,750

1,950


Balance Sheet

YE July 2009 2010 2011F 2012F

Total Assets 584.6 675.1 796.4 886.8

Fixed Assets 386.2 435.7 490.0 515.1

Current Asset 198.5 239.4 306.3 371.7

Current Liabilities 127.5 171.1 216.8 238.2

LT Liabilities 45.9 53.1 73.1 68.1

Shareholders Funds 411.2 414.3 470.1 544.3

Valuation

Our 12-month target price for Scientex of RM3.80 is

derived from Sum-of-parts valuation. We attached a FY12

PER of 9x for property and 8x for manufacturing

businesses. Hence, we initiate coverage on Scientex with a

Buy.

Comparative Valuation PLCs BPP MK TOMY MK PLEN MK UML MK

Share Price (RM) @ date 0.62 1.02 2.07 1.86

Mkt. Cap (RM mil) 112 111 551 454

Ave. Daily Vol. (mil) 44.0 319.0 153.0 36.0

P/E FY11 (x) 0.2 6.9 5.8 8.8

P/E FY12 (x) 5.6 4.4 5.7 9.0

P/NTA na na 0.7 0.5

Yield 6.5 5.5 5.2 3.5

Balance Sheet 2009 2010 2011 2012 Cash Flow 2009 2010 2011 2012

Fixed assets 340.3 387.6 440.5 464.0 PBT 42.1 70.8 92.5 123.0

Others 45.8 48.1 49.6 51.1 Adjustments -7.3 -3.9 -120.1 -149.9

Total 386.2 435.7 490.0 515.1 Depreciation 23.6 23.6 27.6 26.9

Cash 15.6 23.4 20.8 22.4 Changes in working capital 15.5 -12.3 56.0 99.6

Others 182.8 216.0 285.6 349.2 Operational cash flow 73.9 78.1 56.0 99.6

CA 198.5 239.4 306.3 371.7 Capex -11.0 -23.7 -80.0 -50.0

Interest received 1.0 0.5 0.0 0.0

Total assets 584.6 675.1 796.4 886.8 Others -15.2 -66.8 0.0 0.0

Investment cash flow -25.2 -90.0 -80.0 -50.0

ST debt 14.5 42.0 72.0 67.0 Share issuance 0.0 0.0 0.0 0.0

Other liabilities 113.1 129.1 144.8 171.2 Others -45.3 30.4 45.3 -16.2

CL 127.5 171.1 216.8 238.2 Dividend -17.2 -10.8 -23.9 -31.8

Shareholders' funds 411.2 450.8 506.4 580.4 Financial cash flow -62.5 19.6 21.4 -47.9

LT borrowings 22.2 26.2 46.2 41.2 Net cash flow -13.9 7.7 -2.6 1.7

LT liabilities 23.7 27.0 27.0 27.0 Opening cash 29.3 15.4 23.2 20.6

Total 457.1 503.9 579.5 648.6 Closing cash 15.4 23.2 20.8 22.4

Total Liabilities 584.6 675.1 796.4 886.7

Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an

interest in the securities and/or companies mentioned herein.

This report has been prepared by TA SECURITIES HOLDINGS BERHAD for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and will be compensated to undertake the scheme. TA SECURITIES HOLDINGS BERHAD has produced this report independent of any influence from the

CBRS or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia’s website at:

http://www.bursamalaysia.com/website/bm/listed_companies/cmdf_bursa_research_scheme/eResearch.jsp

for TA SECURITIES HOLDINGS BERHAD(14948-M)

(A Participating Organisation of Bursa Malaysia Securities Berhad)

Kaladher Govindan – Head of Research

TASecurities INITIATING COVERAGE - I3investorklse.i3investor.com/files/my/ptres/res3706.pdf · INITIATING COVERAGE FBM KLCI: ... large corporation with two core ... was listed in

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