Cover Story: Is Scientex compelling at current price level?

Wednesday 25 Dec 2024

This article first appeared in The Edge Malaysia Weekly on January 31, 2022 - February 6, 2022

AFTER more than a 133% gain in its share price, from the trough of the coronavirus-driven slump in March 2020 when the first nationwide Movement Control Order (MCO) was imposed, Scientex Bhd’s valuation has surged to its highest in history.

The flexible plastic packaging manufacturer and property developer is currently trading at a forward price-earnings ratio (PER) of 14.22 times — slightly above the average of its peers at 12.88 times, according to data compiled by Bloomberg.

Still, it is not the most expensive stock in the plastics and packaging industry. Scientex’s 71.9%-owned subsidiary Scientex Packaging (Ayer Keroh) Bhd, formerly known as Daibochi Bhd, is currently trading at a forward PER of 18.31 times.

In contrast, SLP Resources Bhd has a forward PER of 15.42 times while that of SCGM Bhd stands at 10.47 times. Thong Guan Industries Bhd’s stock is trading at a forward PER of 10.28 times and BP Plastics Holdings Bhd, at 8.56 times. Tomypak Holdings Bhd is currently loss-making.

Even as Scientex’s valuation becomes more expensive relative to its peers, analysts still see opportunities. Bloomberg data shows that of the eight analysts covering the stock, half of them have a “buy” call while the rest recommend “hold”.

The analysts’ average target price is RM4.99, implying an upside of 8.8% over last Thursday’s closing price of RM4.55. One analyst even set the target price as high as RM5.40.

AmInvestment Bank said in a Dec 9, 2021, report that it is of the view that the valuation of the home-grown global plastic packaging player looks highly compelling at about 13 to 14 times fully diluted FY2023 earnings, given its strong foothold in a consumer-fuelled sector.

“We peg Scientex’s manufacturing segment to an FY2023 PER of 18 times, at a premium compared with its peer stretch film makers’ average forward PER of 12.5 times. This reflects the division’s higher earnings growth of about 12% annually in FY2022 to FY2024 [versus a weighted average of about 10% annually for its global peers],” it added.

AmInvestment Bank likes Scientex for: (1) the strong prospects of the packaging industry due to consumer spending, a shift to on-the-go food and beverages due to a hectic lifestyle and higher food safety standards; and (2) a robust property development business despite the soft market in general, thanks to its right focus on mostly affordable landed residential units in secondary suburbs.

Sector-wise, Kenanga Research is remaining “neutral” on the plastics and packaging industry as it believes the upside potential from a better product mix is negated by the downside risk of global freight issues and labour shortages.

“After the resumption of normal operations without MCO restrictions, plastic players indicated that their utilisation rate ran at an average of 65% to 75% to fulfil backlog orders. Moreover, plastic players such as Thong Guan, BP Plastics and SLP Resources guided stronger demand from their Japanese customers due to power cut disruptions in China that diverted orders to Malaysia, while some of the plastic players have orders up to the first quarter of 2022,” it said in its Dec 30, 2021, report.

What does the future hold for Scientex?

In terms of future earnings, analysts expect Scientex’s growth momentum to continue in the financial year ending July 31, 2022 (FY2022) and beyond, with an estimated earnings per share (EPS) of 32.3 sen for FY2022 and 37.8 sen for FY2023, against 29.5 sen recorded in FY2021.

The group reported a net profit growth of 17.2% year on year to RM457.23 million for FY2021. Revenue reached RM3.66 billion, up 3.9% from FY2020.

In 1QFY2022, Scientex reported an 11.2% y-o-y rise in net profit to RM102.87 million on the back of a 15.7% y-o-y increase in revenue to RM928.17 million. Its results were broadly in line with market expectations.

Compared with the preceding quarter ended July 31, 2021 (4QFY2021), the group’s net profit dropped 27.9% from RM142.65 million while revenue fell 4.3% from RM970.36 million, due to lower revenue generated in 1QFY2022 as fewer property development phases were completed.

UOB Kay Hian Research notes that the first quarter is historically the group’s weakest and expects a stronger 2QFY2022 ahead, buoyed by the swift economic reopening globally.

Despite recording a commendable compound annual growth rate (CAGR) of 11% in net profit from FY2017 to FY2021, the research house deems Scientex’s growth momentum as sustainable in FY2022 and beyond. “This will be driven by the continuous enhancement of its manufacturing segment and robust expansion of its property segment,” it said in its Dec 9, 2021, note.

UOB Kay Hian Research also points to Scientex’s healthy balance sheet, backed by strong operational cash flow (its net operating cash flow recorded a five-year CAGR of 13%) despite its aggressive business acquisitions and capacity expansion. Moreover, it continues to reward shareholders with generous dividends and bonus shares.

Scientex has had a dividend payout policy of 30% since FY2011. It paid out a total of nine sen per share, or RM139.6 million, in FY2021.

Kenanga Research analyst Tan Jia Hui expects the rising global demand for plastic to sustain Scientex’s earnings growth. She has a “market perform” call on the stock, with a target price of RM4.42.

“The sustainability of its performance largely depends on the management’s directions as well as demand and supply of its products. We think it will be sustainable as global demand for plastic is increasing each year and single-use plastic is advocated due to the pandemic,” Tan says in an email response to questions from The Edge.

She notes that current resin prices remain high, but have been steady. “Scientex has been using the Just-In-Time method for raw material procurement. Margin erosion could be due to supply chain disruption and other factors instead of resin prices. Our internal assumption is that the market will remain challenging for the sector.”

In a Dec 8, 2021, note, KAF Research projected that Scientex’s earnings would grow by a three-year forward earnings CAGR of 12% between FY2022 and FY2024, mainly driven by growing demand for flexible plastic packaging products as well as sustainable demand for affordable housing. The research firm anticipates that Scientex will deliver a dividend per share of 10 sen and 11 sen for FY2022 and FY2023 respectively, implying a dividend yield of 2.2% to 2.4% at the current share price level.

Scientex’s share price has jumped 16% in the past year, and recovered from a five-year low of RM1.95 in March 2020 to close at RM4.55 last Thursday. This translates into a market capitalisation of RM7.06 billion.

Balancing financial gain and social responsibility

With investors placing more emphasis on environmental, social and governance (ESG) issues in their investment decisions, companies are actively integrating these considerations into their investment and disclosure processes.

Being in a sector that inevitably comes under scrutiny for environmental impact, Scientex Bhd embarked on a sustainable investment journey with its clients a few years ago, according to managing director and CEO Lim Peng Jin.

“At Scientex, our vision is ‘To Grow the Scientex Community for a Better Tomorrow’ and ‘To Double Up Every Five Years’. This vision anchors ‘what is good for business’ to ‘what is good for people and planet’, and expresses the priority that we place on continuous business expansion that considers the sustainable development of our communities and the preservation of our natural environment,” he tells The Edge.

“Guided by our corporate philosophy, we believe that what we do every day must bring long-term benefit, and therefore we have embedded sustainability as a core aspect of our business processes and thinking.”

Lim observes that international bodies such as the United Nations (UN) and the European Union are increasingly demanding that businesses meet the ESG values of sustainability and diversity.

As Scientex has responded to these forces, its suppliers will have to do the same.

“We have aligned each of our sustainability topics to specific UN sustainable development goals. This gives greater direction and meaning to our ongoing sustainability initiatives, while guiding the continuing process by which we are expanding our commitments year by year,” Lim says.

The group’s sustainability initiatives are supported by three pillars: Creating Shared Sustainable Value; For the Betterment of the Environment; and Our People, Our Pride.

The group has a sustainability steering committee led by Lim and comprises members of the Scientex executive committee, which spearheads the development of sustainability-related policies to govern such practises across the group.

“The policies include an environmental policy, anti-bribery and anti-corruption policy, a whistle-blowing policy and a safety and health policy. We also have a code of conduct for suppliers.”

Lim says the company has only just begun the journey to guide its suppliers to be aware of and uphold the group’s sustainability principles. “It is easier for companies that are more established. Some others need time to learn.

“We have made ESG our business. It is not a separate thing. We seek to drive sustainability through initiatives that reduce our material use, energy use, waste generation and emissions. For example, when we expand our machines, we take into consideration the energy consumed and the greenhouse gas that is emitted. Even for our vision and tagline, we want to embed ESG in it.

“ESG is a journey. So, every year, we will try to improve [as] international standards change. We just continue to improve.”

Scientex released its first sustainability report last year, in tandem with its 2021 annual report. The report discloses the sustainability initiatives and commitments of the company as a whole, covering both its Malaysian and international subsidiaries across the packaging and property development businesses.

Lim says management is also aware of the need for the group to balance the objectives of financial gain and social responsibility.

“Growth is one thing, but worker safety is more important.

“In the last two years, I have had meetings with all my factory people every week to make sure our people are safe. We implemented standard operating procedures; we make sure our workers are vaccinated. Today, more than 99% of our workforce in Malaysia is fully vaccinated and about 60% of them have received a booster shot. We arranged for people to come to our factory to do booster shots for all our workers, including foreigners.”

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