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Friday, March 18, 2016
Brokers Report: Scientex Bhd - Come Onboard a Profit Expansion Ride
Maintain Buy with higher target price (TP) of RM13.05
We are excited about Scientex’s multi-year expansion in its consumerpackaging division which would more than quadruple its initial capacityby the end of 2016 and drive a 3-year earnings CAGR of 35% in FY15-18F.Maintain BUY with a SOP-derived MYR13.05 TP (from MYR10.68, 13%upside) as we revise up our sales volume assumptions for its packagingdivision to account for a higher average utilisation rate of 80% for FY16.
Fast and furious. Already the largest stretch film manufacturer in Asia andamongst the top three globally, Scientex is now embarking on a capacityexpansion spree to grow its consumer packaging capacity through a series ofacquisitions and organic expansions. We continue to highlight Scientex’simpressive feat in building up its consumer packaging to 146,400 tonnes byend-2016, from just 30,000 tonnes in 2014 (CAGR of +121%).
Exciting market opportunities. Scientex’s strategy to ramp up production ofits BOPP film capacity by ten-fold bears favourable market opportunities as thebulk of the supply catered for local demand is currently imported. We think thatthe demand for such film would be anchored by its wide application acrossthe F&B, electrical and electronics and pharmaceutical industries. Scientex’smaiden venture into the CPP film production would also allow it to cross-sell thenew product to its existing clientele due to the complementary nature of itsproducts.
Focus on affordable homes. While the property sector remains soft, we thinkthat management’s focus on affordable housing could help to anchor earnings,as demand for this segment is more resilient. For FY16, management hastargeted to launch around MYR600m worth of proj ects, which includes therollout of the first phase of development on its recently acquired land in Pulai,Johor. These affordable homes are estimated to range between MYR200,000-400,000 per unit.
Maintain BUY. We raise our forecast by 5-17% for FY16-18 to account for ahigher sales tonnage as we turn more confident on management’s guidance todeliver on the guided sales volume. We have also put in a place a higher RNAVdiscount of 40% (from 30%) to account for the softer property market in Johor.We raise our SOP-derived TP to MYR13.05, valuing its manufacturing segmentusing DCF (WACC: 8%, terminal growth:2%) and the property segment basedon a 40% discount to RNAV (from 30%) to account for the softer sentiment inthe property market.
Source: RHB Research Institute, 18 March 2016