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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 farhana@ta.com.my +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
Page 2 of 9
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
TA SecuritiesA Member of the TA Group 15/04/11
Page 3 of 9
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
Source: Company, TA Research
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
Source: Company, TA Research
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
Source: Company, TA Research
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
Source: Company, TA Research
TA SecuritiesA Member of the TA Group 15/04/11
Page 4 of 9
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
Source: Company, TA Research
Figure 7: PVC Leather Cloth
Source: Company, TA Research
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
Source: Company, TA Research
TA SecuritiesA Member of the TA Group 15/04/11
Page 5 of 9
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
Source: Company, TA Research
Figure 10: Upcoming Launch - Emilia
Source: Company, TA Research
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
Source: Company, TA Research
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
Source: Company, TA Research
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
Source: Company, TA Research
TA SecuritiesA Member of the TA Group 15/04/11
Page 6 of 9
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
Source: Company, TA Research
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
Source: Company, TA Research
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.
TA SecuritiesA Member of the TA Group 15/04/11
Page 7 of 9
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.
TA SecuritiesA Member of the TA Group 15/04/11
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%
Source: Company, TA Research
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%
Source: Company, TA Research
TA SecuritiesA Member of the TA Group 15/04/11
Page 9 of 9
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
Source: Company, TA Research
Figure 20: Resin price movement
550
750
950
1,150
1,350
1,550
1,750
1,950
Source: Company, TA Research
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
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