Scientex’s US bet, outlook depends on new stretch-film plant in Arizona

Friday, Mar 24, 2017

The outlook for Scientex Bhd, a plastic packaging firm, may hinge on the company’s US investment.UOBKayHian Research (UOBKH) said a new stretch-film plant in Arizona with a capacity of 30,000 tonnes per annum would see synergistic benefits from the company’s highly efficient manufacturing operations with savings in logistics costs.

The research firm has cut Scientex’s earnings forecasts for financial years ended July 31, 2017 (FY17) to FY19 by 6.9%, 6% and 1.8%, respectively, due to intensifying competition in the plastic packaging sector.

“It is also expected to benefit from anticipated ample supply of shale gas-based resin,” the brokerage said in a report. Scientex announced the US investment involving US$25mil in capital expenditure last November.

UOBKH maintained a “hold” call on the stock with sum-of-parts target price of RM7 and based on 14 times price-to-earnings (PE) pegged to forecast 2018 earnings per share (EPS) of its manufacturing arm and 6 times PE pegged to forecast 2018 EPS of property arm.

It noted that tepid performance is seen in the industrial packaging, penetrative pricing strategy and operating loss from the company’s biaxially-oriented polypropylene film (BOPP) plant.

“Manufacturing earning before interest and taxes margin shrank by 3.7 percentage points year-on-year (y-o-y) in the second quarter due to penetrative pricing strategy, particularly on its BOPP products, and operating losses incurred by its new BOPP plant that is currently only 35% utilised,” UOBKH said.

On its property division, UOBKH said Scientex saw a 21.5% quarter-on-quarter rebound in second quarter FY17 property sales and this is expected due to timing differences, which resulted in low billing of property sales in the first quarter.

“In the second quarter, earnings before interest and taxes rose by a higher quantum of 43.8% due to margins expansion to 30% (from 29.1% in the first quarter.

“Scientex also launched five new projects worth RM190.3mil in gross development value (GDV), bringing the combined GDV of first-half launches to RM371.1mil,” it said.It also noted that unbilled sales amounted to RM600mil and this would be recognised over the next two to three years.

Meanwhile, Kenanga Research said in a report that Scientex’s core net profit of RM116.7mil for the first half of FY17 was broadly within its (40%) and consensus (38%) estimations.

It expects stronger contributions from Scientex’s BOPP plant, moving forward, as it ramped up utilisation in the coming months while expansions at its Rawang and Ipoh plants should contribute to a stronger second half of FY17.

“We expect the continued ramp-up of the BOPP plant as well as expansion in its plants in Rawang (to 60,000 tonnes per year) and Ipoh (to 24,000 tonnes per year) to contribute to a stronger second half.

“All in, we expect total capacity to increase to 304,000 tonnes per year by end FY17 (+6% y-o-y), while we expect sales tonnage to ramp up by circa 18% y-o-y as plant utilisation increases throughout FY17,” it said.

Kenanga said long-term growth in Scientex should be sustained by its new US venture that would be completed in the second half of 2018 because this would allow the company to penetrate a new market outside its existing major exposure in the Japanese market.

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