Case Study of Scientex Berhad

Overview

Scientex Berhad is an established company founded in 1968, which primarily involved as a leading global producer in the manufacturing packaging industrial products and acted like a premier property developer with integrated property projects spread over 3,265 acres of lands in Peninsular Malaysia.

SCIENTX were listed in Main Market of Bursa Malaysia on 8th February 1990. With 50 years of experience, SCIENTX has built an enviable reputation as one of the fastest-growing conglomerates with diversified business in Malaysia, Vietnam, and the United States of America.

 

Business Model

SCIENTX engaged in 4 categories of packaging products such as Industrial Packaging, Consumer Packaging, Automotive Packaging and Green Energy Products.

SCIENTX produces the stretch film, Flexible Intermediate Bulk Containers (FIBC) bags, form-fill & seal bags, woven bags and raffia products for Industrial Packaging. While for Consumer Packaging, SCIENTX manufacture plastic wrapping for bread, beverages, instant noodles, fresh products and feminine products. Polymer products such as Polyvinyl chloride (PVC) leather cloth and Thermoplastic Polyolefin (TPO) sheets for automotive sectors. Few of the clients include Perodua, Proton, Ford, Toyota, Honda, and so on. In FY2012 to FY2014, the company has installed three nanotechnology stretch film line which produces the world’s thinnest stretch film known as Nano6. Currently, the high-end Nano6 product is for customers in Japan and Europe.

In property development, SCIENTX focuses on affordable homes. Previous and current ongoing projects like Scientex Kulai, Scientex Klebang, Scientex Senai and Scientex Skudai.

 

Financial Review Based on the past 5 years of revenue chart above, y-o-y revenue growth from FY2014 (+29.41%), FY2015 (+13.28%), FY2016 (+22.16%), FY2017 (+9.19%) to FY2018 (+9.31%). On a CAGR calculation basis, revenue has grown 16.40%. The increase in revenue was mainly due to the higher sales volume achieved from the manufacturing divisions with higher utilisation in Malaysia plants as well as the expansion of production capacity through the newly established stretch film plants in Phoenix, Arizona, United States of America and integration of Klang Hock Plastic Industries Sdn Bhd in Malaysia.

The gross profit has been increasing from FY2014 (+18.24%), FY2015 (+22.89%), FY2016 (+32.80%), FY2017 (+3.37%) to RM518.3 million equivalents to (+5.09%) in FY2018. On a CAGR calculation basis, the gross profit has grown 15.95% based on 5 years. The generated growth was mainly due to the higher demand for product packaging.

The Profit After Tax (PAT) was grown from RM151.5 million in FY2014 to RM294 million equivalents to 13.12% in FY2018. On a CAGR calculation basis, the Profit After Tax (PAT) grew by 21.19% was in line with the growth of revenue and gross profit of the company.

Based on the past 5 financial years of dividend chart above, the dividend paid by SCIENTX increased years by years from RM47.1 million in FY2014 to RM97.8 million in FY2018. The board has declared a total dividend in respect of FY2018 amounting to 20 Sen per ordinary share or RM97.8 million which comprises of 33.7% net profits of FY2018. (Source: Annual Report 2018)

SCIENTX is committed to enhance shareholder value by delivering satisfactory results in the coming financial year and continue to maintain the dividend payout policy for at least 30% of its net profit to shareholders annually.

Cash Flow Statement

The net cash from operating activities has increased in FY2018 amounted to RM392.4 million from RM322.8 million in FY2017. The increased operating cash flow indicates that the company is healthy and have enough cash used for business expansion.

The net cash from investing activities has a negative figure in FY2018 (-RM702.8 million) was mainly due to the purchase of land held for development, acquisition of a subsidiary, net of cash and cash equivalents acquired, and purchase of property, plant and equipment. The negative cash flow from investing activities indicates that the firm is investing more on their business to grow and believe that it may generate a positive return on additional investment.

The net cash from financing activities has increased tremendously to RM290.8 million in FY2018 from RM21.8 million compared to the previous year. The increase in figures was mainly due to proceeds from short-term borrowings and term loans, which the company use the cash to boost land acquisition for development, fund merger acquisition, pay a dividend and other activities.

Does the company able to pay back its liabilities? Based on my computation of liquidity ratio, SCIENTX has a current ratio of 1.063 times in FY2018 compared to 1.282 times. Even though there is a slight decrease in this ratio, the company is still capable of paying back its liabilities by using current assets such as inventories, trade receivables, cash and cash equivalents.

 

Future Prospect & Challenges

Scientex Berhad has been participated in the expansion on its landbanks for property development aggressively.

The subsidiary of SCIENTX, Scientex (Skudai) Sdn Bhd has acquired a land bank of 3,611 acres after the completion of the latest purchase of six parcels of land in Penang measuring of 179.9 acres for RM109.59 million. The acquisition will be funded by internally generated funds, bank borrowings and issuance of Sukuk Murabahah. The land purchase is expected to be completed in the first half of FY2020. SCIENTX also has entered into a sale and purchase agreement for six parcels of freehold land in North Seberang Perai via its wholly subsidiary known as Scientex (Skudai) Sdn Bhd. (Source: TheStar, 15Jun2019)

A land in Gombak also has been acquired by SCIENTX with a total of RM123.28 million to boost property development landbank, with a focus on building affordable homes. Another wholly-owned subsidiary, Scientex Park (M) Sdn Bhd has made a proposed acquisition for five parcels of land in Selangor, three parcels measuring of 150.17 acres in Rawang for RM111.21 million and two parcels in Kundang measuring RM16.3 acres for RM12.07 million. (Source: TheEdge, 13 May 2019)

Another wholly-owned subsidiaries known as Scientex Quatari Sdn Bhd paid in full for the proposed acquisition of two parcels of freehold agriculture land in Durian Tunggal, Melaka measuring 208.9 acres for RM68.25 million has been made on 15 Aug 2018. All lands acquired will be developed into mixed-property development. (Source: TheStar, 15Jun2019)

Based on The Edge March 2019, SCIENTX will reinforce their position in the global flexible packaging market and Malaysia’s affordable homes segments which are guided by their vision to achieve one million metric tonnes in manufacturing capacity and build 50,000 affordable homes by FY2028.

SCIENTX has takeover Daibochi Bhd by acquiring 42.41% stake in Daibochi for RM221.1 million of RM1.59 per share. The merger acquisition can consider as good news for both companies because they have the biggest international profile among packaging players, and they deal with industrial customers and players who are manufacturers. The takeover offer is aimed for expanding SCIENTX’s reach in the global flexible plastic packaging market, while combined expertise of both companies would also benefit Daibochi Bhd to improve on operating efficiency. (The Malaysian Reserve, 12Feb2019)

My Insight

Based on my calculation on Discounted Earnings Model, Scientex Berhad has a fair value of RM13.427. The current market value of SCIENTX is RM8.63 which is undervalued. (Based on 25 Sep 2019). SCIENTX has a beta of 0.382 (500days) indicates that the company is less volatile than the current market. Based on my computation of Compound Annual Growth Rate (CAGR), SCIENTX has an expected market return of 6.11%. SCIENTX has also achieved a double-digit of Return on Equity (ROE) which is 16.433% in FY2018 considered as healthy even though the ROE has a slightly decreased from 16.664% in FY2017.

In conclusion, SCIENTX has solid growth as the revenue, gross profit and profit after tax are increased years by years. The company has a bright prospect in the future by looking at the expansion of its business in property development to acquire landbanks with the focus on building affordable homes. The merger acquisition on Daibochi Bhd will significantly boost operating efficiency and to capture new growth opportunities. I believe the company can grow very well in the future.

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Written by Stella Goh | 10 October 2019.

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Site last updated October 10, 2019 @ 1:39 am; This content last updated October 10, 2019 @ 1:39 am