Repackaging Future Prospects
While the economic reopening is poised to lift Scientex’s top-line growth, FY22-23 will
be incredibly choppy for the group as inflationary pressures, particularly from material
costs, will likely result in meaningful margin compression. Nevertheless, we remain
confident that management’s convincing execution track record will allow the group to
steer through these temporary headwinds, re-affirming the group’s resilient mid/longterm outlook. Maintain HOLD with a lower target price of RM4.39.
WHAT’S NEW
• Volume growth remains intact for Scientex in FY22-23 amid progressive economic
reopening. With Malaysia and countries globally shifting away from the pandemic-induced
full-scale lockdowns towards full economic reopening, we believe that Scientex will largely
benefit from demand recovery, easing of supply chain disruptions as well as capacity
expansion for its plastic manufacturing segment. Meanwhile, Scientex’s property segment is
also expected to deliver better progress billing and property launches as construction
activities largely resume. We are forecasting a 7.6-8.8% revenue growth for Scientex in
FY22-23.
• Input inflation likely to compress earnings spread and margins for both
manufacturing and property segments. For the manufacturing segment, we expect resin
prices (which have surged 8-26% ytd) to remain high throughout FY22-23 and negatively
affect the segment’s margin as the group usually has a time lag to pass through the cost.
For the property segment, a steep increase in prices of building materials such as cement
and steel is also expected to exert downward pressure on the segment’s profitability margin.
Based on a survey by the Real Estate and Housing Developers Association (REHDA),
construction costs are expected to increase by 19% in 2022. As such, we are forecasting the
group’s FY22-23 net margin to ease by 1.9% and 0.9% yoy respectively.
• Valuations remain reasonable for solid long-term prospects and management’s
strong execution track record. While Scientex’s share price has retraced by about 20%
from the recent peak, we deem its current valuations to be fair, with about 10% upside
based on our forecasted FY23 valuations. We also believe that management’s effective
execution capability, as proven by the group’s stellar track record (5-year net profit CAGR of
14% in 2016-2021), will boost investors’ confidence in the group’s robust long-term outlook
and allow them to look beyond the temporary cost headwinds that will gradually moderate.
STOCK IMPACT
• Looking beyond temporary headwinds towards steady mid/long-term prospects.
While both of Scientex’s manufacturing and property segments are facing temporary
headwinds, we believe that the group still has a resilient mid/long-term outlook. This is
anchored on: a) the manufacturing segment’s capacity expansion (the robotic stretch film
plant commencing operation in 2HFY22 will lift domestic stretch film capacity by >10%); b)
the manufacturing segment’s better sales mix of value-added products which will sustain
profit margins at 8-10% from the previous 6-8%; and c) the property segment’s robust
contributions from the maiden launches of landed properties in Negeri Sembilan and Kedah,
as well as the group’s first high rise in Klang Valley in 2HFY22.
• Manufacturing segment will continue to fuel mid- to long-term growth. We deem that
Scientex’s plastic packaging segment has exhilarating growth potential, underpinned by: a)
demand recovery following global economic reopening; and b) a gradual shift of its
production lines to automation, which could increase output by several folds. With its
dominant position in the plastic packaging industry and strong balance sheet, we also do not
rule out the possibility of Scientex acquiring more downstream manufacturers, given that the
past few acquisitions have been synergistic and allows it to access new product segments
and clienteles.
• High resin costs to continue, but impacts partially buffered by efficient cost
management. Resin prices have been surging in 2QFY22 (up 8-26% yoy) due to a high oil
price environment amid the Russia-Ukraine war. Note that Scientex was affected by higher
resin prices (60-70% of total cost), particularly for custom films which have a longer lead
time of about three months vs stretch film’s 4-6 weeks as the group has a time lag in passing
through the cost to customers. Nevertheless, we understand that the group usually holds
about one month inventory of raw materials, which will partially mitigate the impacts. Based
on our back-of-the-envelope calculations, a 1% rise in resin cost will translate into additional
raw material costs of 0.4%.
• Property division still poised for robust growth in FY22. While oversupply persists in
Malaysia’s property scene, Scientex will stand as an outlier and deliver resilient revenue
growth in FY22, backed by: a) its ability to keep prices low with >60% of its affordable
housing units priced below RM200,000, b) aggressive landbank acquisition with lower-thanmarket costs; and c) standardisation of designs which enables it to launch projects within
one year from signing of the land sales and purchase agreement, and completion of projects
within 18 months. To note, the group also intends to launch a total of 6,000 property units
across 24 launches worth about RM1.7b within FY22.
EARNINGS REVISION/RISK
• We reduce our FY22-23 net profits by 9% and 5% respectively, as we trim the earning
margins of both manufacturing and property segments to reflect higher input costs.
VALUATION/RECOMMENDATION
• Maintain HOLD with a lower target price of RM4.39. Our target price implies 14x FY23F
PE (+1SD above mean), which we deem is justifiable given Scientex’s excellent growth track
record (5-year net earnings CAGR of 11%). Current risk-to-reward ratio is also fairly
balanced with the stock trading at close to mean FY23 PE valuations, which prompts us to
maintain our HOLD recommendation.