By Xavier Kong
UOB Kay Hian (UOBKH) maintained its “buy” call on Scientex Bhd, as well as its target price of RM12.50, noting its positivity on the group’s strong performance in its first quarter of financial year 2016 (1Q16) as well as the expectation of minimal foreign exchange (forex) losses for the group from 2Q16 onwards.
“Scientex recorded a RM27.2 million forex loss in financial year 2015 from paring down its US dollar-denominated loans. As at the end of their 1Q16, Scientex recorded a much lower forex loss of RM3.5 million from paring down its US dollar-denominated loans. As these loans now stand at only RM9.7 million, about 3% of total borrowings as of the end of October 2015, we expect minimal or no forex losses from 2Q16 onwards,” said UOBKH.
Also noted was that the group’s 1Q16 performance had surpassed the expectations of both UOBKH, as well as the consensus, with both the group’s manufacturing and property divisions had registered strong year-on-year earnings before interest and tax growth, with the manufacturing segment seeing a 158.5% growth year-on-year, attributed to better proportions in the sales mix, the stronger exchange rate between the US dollar and the ringgit, and operating efficiencies and economies of scale.
The research house noted that, moving forward, they expect strong earnings performances in the subsequent quarters, driven by an expansion in manufacturing capacity and the resilient demand for the group’s properties.
“Scientex’ three-year expansion plan to transform itself into a regional consumer packaging player and to become the world’s third-largest industrial stretch film manufacturer will materialise this year. We understand from management that Scientex has begun to ramp up utilisation at its new cast polypropylene film plant in Malacca with a production capacity of 12,000 metric tonne (MT) per annum in December 2015,” said UOBKH.
The research house noted that management has guided that the biaxially oriented polypropylene (BOPP) plant in Pulau Indah will come on stream by mid-2016 as planned, and will increase the group’s current BOPP production capacity to 60,000 MT per annum from the current 6,000 MT per annum.
Scientex will be installing three more polyethylene film production lines at its Rawang plant by the middle of this year, which should raise the group’s total capacity from 62,400 MT per annum to 74,400 MT per annum.
Management has also guided that the group is looking to further expand its production capacity by an additional 50% through its recently acquired Scientex Great Wall Ipoh Sdn Bhd by early 2017. The subsidiary had contributed about 10% in total sales for the group’s manufacturing segment in its 1Q16, and has allowed the group to leverage on the subsidiary’s existing list of major clients to move into markets such as Japan, Indonesia, the Philippines, Thailand, and India.
The group’s property segment has also been reported as resilient, due to its focus on affordable properties. The group currently has a pipeline of projects with a total gross development value of about RM4 billion based on its existing land bank, which should support Scientex for another eight years.
“Scientex has recently proposed to acquire a 326-acre plot of land in Pulai for RM219 million, which will increase its land bank to 1,200 acres from the current 870 acres. Management plans to build landed residential homes on the Pulai land, with an estimated gross development value of between RM2 billion and RM3 billion,” noted UOBKH.
As of the noon close, Scientex shares were last traded at RM9.58, down 19 sen.
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