Downgrade to MARKET PERFORM from OUTPERFORM with a higher target price (TP) of RM9.38
We met up with SCIENTX?s management last week and came away feeling comforted as their expansion plans are well on track. As expected, the Group is focused on the expansion of its BOPP and PE plants, and longer term growth of stretch film plant in Arizona, US. All in, we maintain FY17-18E earnings. Downgrade to MARKET PERFORM (from OP) but increase TP to RM9.38 on a higher PE of 6.8x for our property segment.
PE plant expansion at Ipoh to be completed by end CY17. As part of expanding its consumer segment, SCIENTX is in the midst of completing capacity expansion at its PE plant in SGW Ipoh to 24,000MT p.a. by end CY17 (1HFY18), increasing total capacity for the PE segment to 84,000MT p.a. which is on track.
BOPP plant focused on ramping up capacity. The BOPP plants in Rawang and Pulau Indah currently have a total capacity of 60,000MT p.a. (as at Dec 2016) and will continue to see a ramp-up in capacity utilised going forward. The Pulau Indah plant which commenced operations in Sept 2016, is currently utilizing 35% of its capacity, while we believe up to 50% of capacity could be utilized by end CY17, with full utilisation within two years.
Growth from US expansion to accrete mostly in FY19. SCIENTX's venture into the United States was to penetrate a new stretch film market outside its existing major exposure (i.e. Japanese market), with cost savings from anticipated ample supply of shale gas-based resin, as well as lower distribution costs to the American market. We believe the plant will start operations in 2H18, targeting 30,000MT p.a. capacity, with accretion to earnings mostly by FY19. Based on our back of the envelope calculations, once the US plant is at full capacity by FY19-20, we believe it could contribute c.RM12-13m to the bottom- line.
Property segment focusing on affordable residential. As for the property segment, the Group has launched five new projects worth RM190m in 2Q17, which includes maiden launches in Ipoh, consisting mainly affordable properties. Unbilled sales of RM600m are expected to be recognized over the next 2-3 years, while a pipeline GDV of RM6b is expected to sustain for another 8-10 years.
No change to earnings as expansion plans well on track. The Group expects its consumer packaging plant expansion to be completed by end-CY17, and will focus on ramping up capacity going forward, while the industrial packaging segment is focused on expansion in the US, contributions accreting mostly in FY19. All in, we expect total capacity to increase to 304-340k MT p.a. in FY17-18, while we expect sales tonnage to ramp up by c.18-29% YoY as plant utilisation increases throughout FY17-18. We believe the Group will allocate c. RM260-140m for capex in FY17-18, which we have accounted for in our estimates. As such, we maintain FY17-18E earnings of RM292-347m.
Downgrade to MARKET PERFORM (from OP) on a higher TP of RM9.38 (from RM8.36) based on our Sum-of-Parts FY18E valuations. For the Property segment, we apply a higher PER of 6.8x (from 4.0x), which is at a 10% discount to small-mid-cap property players due to as SCIENTX?s exposure in Johor, and maintain an applied PER of 17.6x for the manufacturing segment. We downgrade our call to MARKET PERFORM (from OP) as most upsides have been priced in, while its share price has done well (+30% YTD).
Source: Kenanga Research - 25 April 2017
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