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Sunday, November 18, 2012

Scientex Bhd (RM3.15; TP:RM3.94): A good long term investment prospect which has a new venture into F&B


Background: 
The company is one of the world’s leading industrial packaging manufacturers with various products such as stretch film, laminated bags, bulk bags, corrugated carton boxes etc. It is the 5th largest stretch film manufacturer in the world and the largest in Asia with 33% market share. Its products are being exported to over 60 countries around the world. Scientex is also involved in polymer manufacturing business supplying automotive interior products to auto manufacturers such as Subaru, Nissan, Toyota, Proton, Perodua, Honda, Suzuki and Yamaha. 

Besides its manufacturing business, Scientex established itself as a successful property developer focusing on affordable housing with property development in Johor and Melaka. 

Earnings prospects: 
The company achieved a net profit of RM84mil with revenue of RM881mil for FY7/2012. Packaging manufacturing and property development accounted for 33% and 66% of the earnings respectively and this proportion had been rather consistent over the past 2 years. Nonetheless, the manufacturing division is expected to grow more aggressively with the proposed acquisition of GW Plastic Bhd which will be completed by 1Q2013 coupled with the expansion plans of its production capacity. 

RM'000
Scientex proposed to take over GW Plastic Bhd early Oct 2012 at a price of RM283.2mil, which would be at PE of 13.2x based on net profit over the past four quarters of RM21.5mil. GW Plastic Bhd is a flexible plastic packaging manufacturer mainly for the F&B market with stretch film production capacity of 34kMT. With the acquisition of GW Plastic, Scientex’s production capacity could increase from 120kMT to 154kMT per year, a 28% increase. In addition, Scientex could leverage on GW Plastic’s exposure to recession-proof F&B industry of which Scientex has little or no presence, coupled with synergistic benefits resulting from economies of scale. It is interesting to note that GW Plastic’s revenue and earnings per MT of production double that of Scientex, implying that selling prices of packaging products for the F&B industry are much higher. This bodes well for Scientex which is expanding into the more lucrative F&B business. As for expansion plans, Scientex will boost its production capacity from 154kMT per year post acquisition to 194kMT per year by 2013, of which 10kMT/year of the total increase of 40kMT/year will be contributed by GW Plastic. 

Assuming similar margins and expansion plans go as planned, GW Plastic and Scientex manufacturing division could contribute net profit of RM24mil and RM35mil respectively. If net profit from property development remains constant at about RM55mil, total profit could be at RM114mil per year. Taking into account the interest expense to be incurred from the RM200mil loan to finance acquisition of GW Plastic, net profit should be around RM105mil to RM110mil. ROE could expand from current 15% to about 20%.  

Having said that, I haven’t even imputed the potential cost savings from synergies between the two companies and potential lower oil prices coupled with property earnings growth underpinned by its RM171mil unbilled sales, all of which could give earnings surprises. 

Valuation: 
Assuming net profit of RM110mil for 2013, PER 2013 is only at 6.6x. Dividend yield will be at 4.5% which is fairly commendable. By attaching PER of 7x to its property development and PER of 10x to its packaging manufacturing division, its target price should be at RM3.94. I see no reason why PER of 10x should not be attributed to its packaging business which is one of the largest in the global market. Just look at Daibochi or Tomypak which are trading at forward PER of 11x and 6.6x respectively, yet they are less than half the size of Scientex post acquisition in terms of revenue and earnings. It’s equally affirming that Lim Peng Jin, the MD of the company who holds 49.8% stake, had been buying up shares at share prices of RM3.06 to RM3.22 over the past few weeks. An 8 sen dividend per share will be paid out by 31st Jan 2013, ex-date on 10th Jan 2013.

Market Data:
Shares outstanding: 230mil
Market Cap: RM729.1mil
PER'12-13: 8.7x-6.6x
Div Yield: 4.5%

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