TASecurities INITIATING COVERAGE small manufacturer of polyvinyl chloride (PVC) leather cloth and sheeting

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    TA Securities A Member of the TA Group

    MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

    INITIATING COVERAGE

    FBM KLCI: 1525.80

    Scientex Berhad Friday, April 15, 2011

    Stretching Its Wings TP: RM3.80 (+50.7%)

    Business Summary : Manufacturing Company Major Shareholders (%) : Scientex Holdings (26) : TM Lim Sdn Bhd (8) Recommendation: Buy

    : Teck Meng Lim(7) Market Capitalisation (RMmn): RM579.6

    Company Website : www.scientex.com.my Current Price: RM2.52

    IR Contact : Tan Hong Koon Market/ Sector: Manufacturing

    03-55191325 Stock Code: 4731

    TA Research Team Coverage farhana@ta.com.my +603-2072-1277 ext:1635

    Key Stock Statistics

    YE July 2011F 2012F

    EPS (sen) 34.6 46.1

    PER (x) 7.3 5.5

    Gross div/ share (sen) 10.4 13.8

    NTA/share (RM) 2.0 2.4

    Book value/ share (RM) 2.0 2.4

    Issued capital (mn shares) 230.0 230.0

    52 weeks share price range (RM) 2.9 (high) 1.34 (low)

    Per Share Data

    YE July 2009 2010 2011F 2012F

    Book Value (RM) 1.8 1.8 2.0 2.4

    Cash (sen) 6.7 10.1 9.0 9.7

    Earnings (sen) 16.9 27.1 34.6 46.1

    Dividend (sen) 5.0 9.0 10.4 13.8

    Payout Ratio 29.5 33.2 30.0 30.0

    PER (x) (x) 14.9 9.3 7.3 5.5

    P/ Cash Flow (x) 37.5 25.0 28.2 26.0

    P/ Book Value (x) 1.4 1.4 1.2 1.1

    Dividend Yield (%) 2.0 3.6 4.1 5.5

    ROE (%) 9.5 15.0 16.9 19.5

    Net Gearing (%) 5.1 10.8 20.7 15.8

    P&L Analysis (RM mil)

    YE July 2009 2010 2011F 2012F

    Revenue 509.7 694.8 823.3 1027.9

    Operating Profit 42.5 70.0 88.3 119.0

    Depreciation (23.6) (23.6) (27.1) (26.4)

    Interest Expenses (1.9) (1.3) 2.2 2.0

    Pre-tax Profit 42.1 70.8 92.5 123.0

    Effective Tax Rate (%) 8.3 12.2 14.0 14.0

    Net Profit 38.9 62.3 79.7 105.9

    Operating Margin (%) 8.3 10.1 10.7 11.6

    Pre-tax Margin (%) 8.2 10.2 11.2 12.0

    Net-Margin (%) 7.6 9.0 9.7 10.3

    Share Price relative to the FBM KLCI

    Source: Bloomberg

    1. Summary

    We initiate coverage on Scientex Berhad (Scientex) with a

    Buy recommendation. We value Scientex at RM3.80/share

    based on Sum-of-parts valuation methodology. Scientex

    has two core businesses, ie: manufacturing of packaging

    and property business. We are positive on the outlook for

    the group mainly due to improving global economic

    conditions coupled with positive outlook for the property

    sector within the Iskandar Malaysia corridor.

    2. Investment Highlights

    One of the largest stretch film producers in the world

    � Capacity expansion of its manufacturing line will turn

    Scientex into one of the biggest five stretch film

    producers in the world.

    � Export of products to over sixty countries diversifies

    earnings and country exposure, hence reducing

    earnings volatility.

    Profitable property business

    � Scientex has sizeable landbank of 1100 acres, located

    in Johor and Melaka, which would keep the company

    busy for the next 3 years.

    � Scientex is one of the beneficiaries of the “My First

    Home Scheme’ as the company has been building

    affordable homes which priced at RM110k-450k.

  • TA Securities A Member of the TA Group 15/04/11

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    3. Company Background/ Overview

    Scientex was incorporated in 1968 and started as a

    small manufacturer of polyvinyl chloride (PVC)

    leather cloth and sheeting. It has now expanded into a

    large corporation with two core businesses, ie:

    manufacturing and property. Under its manufacturing

    arm, Scientex is involved in industrial packaging,

    manufacture of polymer products for automotive

    industry and chemicals for food packaging. Scientex

    was listed in 1990 under the name Scientex Industries

    Berhad and changed its name to Scientex

    Incorporated Berhad in 1995 and Scientex Berhad in

    2008.

    Scientex’s manufacturing division comprises two business

    units namely packaging and polymer. The packaging

    business unit produces various packaging products

    designed for outer, middle and inner packaging

    applications ;

    i. Outer packaging – Stretch film, Stretch Hood, PP

    Strapping Band, HDPE and PP Tying Tape (Raffia)

    ii. Middle packaging- Woven Bags, Bulk Bags (FIBC) and

    Corrugated Carton Box

    iii. Inner packaging –Adhesives, Lamination Film and PVC

    Rigid Film

    Figure 1: Corporate Structure

    Source: Company, TA Research

  • TA Securities A Member of the TA Group 15/04/11

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    Products

    Scientex has one of the largest stretch film

    production facilities in the Asia Pacific region. In

    fact, it is the first in the region which utilize two

    cast-line units using in-line winder technology for

    hand wrap production. Utilizing the latest advanced

    winder technology from Black Clawson USA enables

    the company to reduce the time and costs in

    downstream production, making the Scientex’s film

    products more competitive in the world market.

    Scientex produces premium stretch film products

    under the brand name ‘Elite’. These products are

    half the size of conventional films but possess

    comparable holding force, offering up to 50%

    savings on consumption and 30% on cost to

    consumers. According to management, almost 95%

    of its stretch films are dedicated for the export

    market to 60 countries. Scientex has the capacity of

    producing 120,000MT by FY12 which will put them

    the 5th largest stretch film producer in the world.

    Figure 2: Elite Stretch Film

    Source: Company, TA Research

    Stretch Hood film is a revolutionary way of packing

    by wrapping the goods with protective film that can

    be applied either for five sided protection or as a

    tubular sleeve around the goods within open top

    and bottom. With UV stabilizer, most of its products

    can be easily stored outdoor from between three to

    six months period, providing exceptional savings in

    storage costs as compared to warehouse storage.

    Stretch Hood is fast gaining acceptance due to its

    excellent tear and puncture resistance as well as its

    holding force.

    Figure 3: Stretch Hood

    Source: Company, TA Research

    PP Strapping band is widely used for unitization and

    bundling of goods and is produced using the latest extrusion

    technology and high quality raw materials which enables

    better strength. Its PP Strapping Band range includes, i)Hand

    & Regular Grade, ii)Premium-Fully Auto Machine Grade,

    iii)Special-Light Weight Band, iv)Heavy Duty Band.

    Figure 4: PP Strapping Band

    Source: Company, TA Research

    Some of its “niche” manufacturing production include

    i)Woven Bag, ii)FIBC Bag (Bulk bags), iii)Carton Box,

    iv)Lamination Film, v)PU Adhesives and vi)PVC Rigid Film.

    The niche products command higher margin but at much

    lower volume.

    Figure 5: Other products

    Source: Company, TA Research

  • TA Securities A Member of the TA Group 15/04/11

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    Polymer

    The polymer division manufactures and distributes

    PVC leather cloth, PVC sheeting, skin materials for

    automotive interior and components such as car

    seats, instrument panels and door trims. Its

    polymer business unit specializes also produces

    automotive carpet mats for manufacturers and car

    assemblers in the ASEAN countries as well as

    Australia, India and Egypt.

    Figure 6: Polymer

    Source: Company, TA Research

    Figure 7: PVC Leather Cloth

    Source: Company, TA Research

    Being the pioneer in the manufacturing of PVC leather cloth

    in Malaysia, the polymer business unit is able to produce

    products for seat covers that meet OEM specifications in

    terms of physical properties, strength, durability and

    appearance. Currently, its seat materials are used by

    established manufacturers such as Subaru, Nissan, Toyota,

    Proton, Perodua, Honda, Suzuki and Yamaha.

    Scientex also manufacture tufted carpet mats made for

    specifications for both domestic and overseas established

    car manufacturers.

    Figure 8: Tufted Carpet Mat

    Source: Company, TA Research

  • TA Securities A Member of the TA Group 15/04/11

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    Property

    Scientex went into the property business in mid-

    90s, starting with Pasir Gudang. Scientex acquired

    250 acres land in Kulai in 2007-08 and xxx acres in

    Skudai in 2010 to replenish its landbank for future

    development.

    The introduction of “shear wall design” in the

    construction of terrace houses in 2000 has resulted

    in the delivery of products on consistent quality,

    while reducing manpower and construction time.

    Note that Scientex needs approximately 12