Why Scientex Berhad is a Special Stock

Not many companies on Bursa Malaysia can boast of an 18-year compounded annual growth rate (“CAGR”) in net profits of 26%. This is the enviable track record of Scientex Berhad (“Scientex”) (KLSE: SCIENTX) which was achieved that from the financial year (“FY”) 2001 to FY2019. 

(Source: 2019 annual report)

In this article, we take a closer look at the business, management and financial aspects of Scientex, to assess whether the company remains a worthwhile investment going forward. 

Corporate background

Established in 1968, Scientex was previously a fledgeling enterprise engaged in the manufacture of PVC leather cloth and sheeting. Today, Scientex is an established industrial and consumer packaging manufacturer and a leading developer of affordable homes. 

Scientex’s manufacturing segment contributed 73% of revenue, but only 38% of operating profit to the company in FY2019. Conversely, its property development provided 27% of revenue and 62% of operating profit to the company for the same year. 

Under its Vision 2028 strategy, Scientex aims to hit RM10 billion in revenue by 2028 through organic and M&A-led expansion. 

(Source: 2019 presentation slides)

(Source: 2019 presentation slides)

Manufacturing 

Scientex is one of the world’s largest producers of industrial stretch film with an export market that covers more than 60 countries. It is also a leading player in PP strapping bands in Asia as well as a leading producer of other industrial packaging products such as PIBC bags, form-fill & seal bags, woven bags and raffia products. 

Since 2013, it has also emerged as one of Malaysia’s leading producers of consumer packaging products, while remaining a mainstay in the manufacture of component parts for automotive interior.

Overall, Scientex exports over 75% of its manufactured products to countries such as Japan, South Korea, Taiwan, Russia and Australia. All its export sales are denominated in USD. 

On the other hand, the group’s resin procurement, which makes up close to 65-70% of its manufacturing operating costs, is also denominated in USD. Ultimately, with this natural hedge, profits are less susceptible to USD fluctuations. 

Resin is a petrochemical product. Hence, its pricing is positively correlated to crude oil. In the event of sharp fluctuations in resin prices or the USD, Scientex has a back-to-back arrangement with customers on potential price revisions and cost pass-through. 

Property development

Scientex has been involved in the property development business since 1995. Its pilot project was Taman Scientex Pasir Gudang. Since then, Scientex has replicated the affordable housing model to other development projects. 

Over the years, the group has acquired a total land bank of 3,795 acres spread across 19 prime locations situated in the states of Johor, Melaka, Selangor, Perak and Penang. To date, Scientex has delivered over 18,500 affordable homes priced below RM500,000. Scientex’s developments have ballooned up to a total gross development value of RM22.0 billion over the years.  

Under its Vision 2028 strategy, Scientex aims to build 50,000 units of affordable homes. To achieve this, the group continues to explore land bank expansion. Scientex is targeting RM1.3 billion new launches in FY2020 (comprising 4,900 units across 22 launches). 

Value-added acquisitions 

Scientex’s management is ambitious in its pursuit of inorganic growth. Between 2013-2018, Scientex had invested approximately RM571.2 million for the acquisition of packaging companies, which has boosted the growth in its manufacturing revenue. 

Year	Acquisition	Price (RM’m)	Business
2013	Great Wall Plastic Industries Berhad	283.2	Diversified packaging
2014	Seacera Polyfilms Sdn Bhd	40.0	BOPP films
2015	Mondi Ipoh Sdn Bhd	58.0	Consumer packaging
2018	Klang Hock Plastic Industries Sdn Bhd	190.0	Diversified packaging
	Total	571.2

(Source: Affin Hwang Capital research report 11 January 2019) 

Moreover, on 19 February 2019, Scientex completed the acquisition of a 42.5% controlling stake in Daibochi Bhd (“Daibochi”) (KLSE: DAIBOCI) for RM222.5 million. On 1 April 2019, Scientex’s equity stake in Daibochi increased to 61.9% upon completion of a mandatory take-over offer.  Separately, on 1 April 2019, Daibochi completed the acquisition of 100% equity interest in Mega Printing & Packaging Sdn Bhd for RM125.0 million. These acquisitions allow Scientex to expand its client base and enhance capabilities in the flexible packaging business.

Major Shareholders

The founding Lim family collectively owns about 55% of the group. Managing director, Mr. Lim Peng Jin, a chemical engineer by profession, has been with the company since 1991. He has local and international working experience in the fields of polymer and chemicals during the early years of his career and is very hands-on in Scientex. In fact, the success of the group owes much to his extensive involvement. 

(Source: 2019 annual report) 

Financials  

Measure 1: Growth in revenue and profits

Scientex has more than doubled both its revenue and profits within the last 6 years. This represents

growth in revenue and net profit after tax at CAGR of 15.35% and 17.58% respectively from FY2014 to FY2019. These growth rates are impressive. 

Measure 2: Profitability

Scientex enjoys stable gross profit margin of 18.4 – 21.7% and net profit margins of 8.8 – 10.9%, during the past 6 years. Return on equity ratios were at double digits albeit at a decreasing rate from 20.2% in FY2014 to 13.9% in FY2019. 

Measure 3: Liquidity

Scientex has a conservative managed balance sheet as its net gearing ratio was around 0.1x – 0.3x from FY2014 to FY2019. Because of this, we are confident that the group is able to meet its debt obligations, in spite of the relatively low cash ratios.  

Round 4: Dividends payout

Scientex has a policy to distribute at least 30% of its profits as dividends. In fact, its dividend per share has increased each year in line with the growth in its profits.  

Release of 2Q 2020 financial results

While writing this piece, Scientex released its financial results for the second quarter ended 31 January 2020. A snapshot is enclosed.

	Cumulative period ended	Change
	31.1.2020 RM’000	31.1.2019 RM’000	%
Revenue	1,791,743	1,480,224	21.0
Operating profit	259,290	179,463	44.5
Profit after tax	193,191	131,110	47.4

Scientex commented that the increase in revenue and profits were contributed by both its manufacturing and property divisions. Its manufacturing division recorded higher sales volume, while its property division saw better sales and progress billing achieved from its projects.  

The group continues to see a sustainable performance for its manufacturing division in spite of the COVID-19 outbreak. It will remain focused on its overall long-term strategy to enhance production efficiency, producing more sustainable and value-added products, whilst reducing cost and wastage. 

On property development, the group sees encouraging demand for its affordable housing products in all its on-going projects in view of the accommodative interest rate regime. The group remains focused on its core competency of building and delivering affordable homes through acquisitions of affordably priced land banks, efficient utilisation of land spaces via township planning, as well as better construction costs control. 

Conclusion

With a closing share price of RM8.25 as at 5th May 2020, Scientex is trading at a price of earnings (PE) ratio of 11, with an indicative yield of 2.42%. The group has resilient earnings prospects from both its twin business divisions and is led by a strong execution team. The group’s track record speaks for itself. With the share price correcting over 20% this year, the group can be considered an attractive prospect to value investors.        

(Source: Google Finance)

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