SCIENTX ... Oct2011

Scientex Berhad - TA Securities.

1. Review
Scientex Berhad will announce its FY11 results sometime next week. We continue to like Scientex for its diversified two core business operations; i) manufacturing and ii)property coupled with expansion plans that will sustain growth over the mid-to-long term.

Some recap, Scientex has reported a 33% growth in net profit to RM57mn for 9M11. The growth was mainly contributed by the property division which saw a 62% growth in revenue. To add, margin of property soared by 7p.p. thanks to favourable product mix.

On a negative note however, Scientex was impacted by the depreciation of USD which led to a contraction in margin. 80% of its products are exported whilst 65% of its purchases are denominated in USD.

2. Outlook
Going forward, we are positive on Scientex thanks to its mid and long term expansion plans. For its manufacturing line, Scientex will raise production capacity to 120k MT, or a 20% increase by FY12 which will put Scientex as the fifth largest stretch film producer in the world. It will also increase its strapping band production capacity to 24k MT by end-2011, or a 50% growth.

Over the long term, Scientex has entered into an S&P agreement for the purchase of land opposite its current
facility for RM12mn. Thus, we expect capacity to doubleup in 3-5 years time.

This is positive as we expect Scientex to benefit from economies of scale and improved margin. We believe that demand of stretch film is on the rise.

Scientex has also shown defensiveness in its property division with an almost fully-take up rate of its
developments. To add, its high-end property developments command a strong 35-45% margin.
According to the management, its property division’s revenue may contribute up to 30% of total revenue by
FY12 as compared to 25% in the previous year. We  believe its Taman Mutiara Mas and Taman Muzaffar
Heights will contribute strongly in FY11 as seen in 9M11. Going forward, Scientex has enough landbank to keep them busy until 2019, a total GDV of RM2.1bn.

3. Results Preview
We have fine-tuned our earnings estimates for Scientex for FY11 and we are leaving FY12-13 estimates unchanged. We cut our earnings estimates for FY11 by 4.8% to RM75.8mn. The adjustment was
made to impute slightly weaker margin for the manufacturing division due to the impact from USD
and higher raw material prices whilst offset by better property contribution.

Hence, for the FY11, we expect Scientex to report a net profit of RM75.8mn, or a 22% growth against FY10. In our assumption, we expect the property division to contribute 25% to total revenue or RM195mn and RM575mn for manufacturing.

We are expecting equal contribution from the property and manufacturing division to the EBITDA for FY11. This is mainly thanks to better margin of high-end property developments.

4. Valuation
We derive a new target price of RM2.90 based on Sum-of- Parts valuation method. We have cut our sectors target PER in line with the recent downgrade of FBMKLCI. Hence, we attach a 7x FY12 PER (from 9x previously) to the property segment and 6x (from 8x previously) for the manufacturing segment. Maintain Buy.