Scientex Berhad (“SB”) - The new packaging king?

INVESTMENT MERIT

• Major development. SB has proposed to acquire two operating companies from GW Plastics for a total cash consideration of RM283.2m. The company will raise the fund through internal generated funds (RM83.2m) and borrowings (RM200.0m). The corporate exercise is pending the approval of several parties and authorities. Should the deal go through, the company expects it to be completed within six months. 

• Achieving much consistent profits. The revenue of SB has been pretty stable on the back of higher contribution from its manufacturing division vs. property (ratio of 72:28) as the former has been growing organically with a 5-year CAGR of  5.1%. However, the property segment contributes the most  (56:44) to earnings as its margin is much higher. Upon completion of the exercise, the net profit composition will likely be at 50:50. We believe this will further ensure the consistency of profits at the group. 

• Looking at high level synergies. SB will become the new local market leader of both blown and cast films (estimated at around a 60% market share for both products) based on capacity after the acquisition as compared against its peers. We believe this will allow SB to enhance its products range and expand its clienteles to sustain competitive advantages in the industry.  SB should be able to achieve better operating efficiency or even potentially save cost for its major clients to compete with the world-class players.

• Attractive yield. SB has adopted a dividend policy of a minimum payout of 30% of its net profits. Combining the earnings of the new subsidiaries, we project the company to distribute 15.6 sen for FY13, translating into an attractive dividend yield of 6.1%. 

• Due for a rerating? SB is trading at 5.4x FY12A PER and 4.9x FY13E PER, which are undemanding compared to the industry’s average Fwd PER of 8.2x. Given so, and coupled with its stronger position post-acquisition, we believe that the stock may be poised for a re-rating. At this juncture, we conservatively estimate a fair value of RM2.80 for the stock based on its historical PER of 5.4x on our FY13E EPS projection of 52 sen (proforma post acquisition). Should the fundamentals of the company improve after the acquisition, we do not rule out the possibility that it could be rerated to RM3.85, implying the valauation to be at 7.4x (industry average Fwd PER).

TECHNICALS

• Resistance: RM2.70 (R1), RM2.90 (R2)

• Support: RM2.48 (S1), RM2.35 (S2)

• Viewpoint: S-T (Bullish), M-T (Bullsh), L-T (Neutral)

• Comments: Following the news of the acquisition, Scientex's share price has broken out of the rising wedge to signal an acceleration of the uptrend. Support is provided at the return line at RM2.48 and investors can look to buy in closer towards this level., with upside targets RM2.70 and RM2.90

BUSINESS OVERVIEW

Scientex Bhd (“SB”) was established in 1965 to manufacture and market polyvinylchloride (PVC) leather cloth and sheetings. Since then, SB has expanded into stretch film and PP strapping band and has become one of the world’s top five stretch film producers on the back of an annual capacity of 120,000MT. The company has also diversified into property businesses in 1993, with a few on-going mixed development projects mainly in Southern Malaysia. 

BUSINESS MODEL

• Manufacturing

- Stretch Film: 9 production lines to support 120K MT p.a. capacity; 58% of group’s manufacturing revenue on the back of 85% utilisation rate for FY12; 95% export; plant located in Pulau Indah. 

- PP Strapping Band: 12 production lines to support 24K MT p.a. capacity; 11% of group’s manufacturing revenue on the back of 85% utilisation rate in FY12; 99% export; plant located in Malaka.

Source: Kenanga