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Tuesday, September 17, 2013

Scientex (RM5.10; Target (Long-term): Above RM8): TA Research's upgrade precursor to a great quarter? A very good long-term stock to hold

After reading TA research report on 9th Sept 2013, I was very surprised by the upgrades made by TA. They upgraded net profit for FY13 from RM110mil to RM123mil after contacting the management and just 3 weeks away from their quarterly results release. To recap, Scientex made RM80mil for 9MFY13. Thus, for 4QFY13, Scientex's net profit would be RM43mil, based on TA's forecast. That would be a huge increase!! Believable???? We shall see. I will be very happy already if Scientex makes RM35mil net profit for 4QFY13. 

Reasons for upgrade: 
  • USD up, profits up: More than 80% of products are exported overseas and are denominated in USD. Thus, a stronger USD will mean better earnings. 
  • A higher progress billing from Taman Scientex, Mutiara Mas, Skudai due to higher selling prices. The total outstanding GDV reported in 3Q13 was RM5.5bn, mainly attributed to the higher selling prices for most of its land banks especially that of Gardens Residence in Taman Scientex Mutiara Mas. 
  • Higher operating margins from consumer packaging business. Based on my own analysis, consumer packaging products (from GW Plastics which was acquired by Scientex) command much higher selling prices (almost double) as compared to its existing industrial packaging products. Thus, continued expansion into this sector will lift up margins going forward. Currently, its consumer packaging business is very high in demand that current capacity cannot meet the demand.

Valuation: The stock price keeps going up even as I'm writing this. Based on price of RM5.10, assuming it can make RM160mil for FY14, its PER is just 7x. If PER of 12x is attached, the stock should be worth RM8.60!!! Give the stock another 1-2 years, investors could be in for a good harvest. Besides, 30% of its profits will be given to shareholders as dividends, thus dividend yield could be more than 4% for FY14.

Why I like this stock so much? 
  • The boss is a proactive owner owning about 60% stake with proven track record and actively engages with the media and shareholders.
  • A leader in packaging business and its products are in high demand (Top 3 stretched film producers in the world, top bread packaging producer in Asia)
  • USD strength means higher profits.
  • Expansion drive to boost production capacity.
  • Visible earnings prospects
  • Cheap valuation and decent dividend yield.

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