Scientex

Scientex: "Recommendation: BUY
Price: MYR1.42 12-Month
Target Price: MYR1.70

• Scientex turned in encouraging 1QFY10 (Jul) results, with net profit rising 69% YoY to MYR12.7 mln. The net profit exceeded our expectations, reaching 30% of our previous FY10 projection.

• Both the manufacturing and property development divisions recorded healthy sales and profit growth. Revenue and operating profit of the manufacturing business grew 4% YoY and 60% YoY respectively, while the property arm saw sales and operating profit expand by 28% YoY and 44% YoY respectively.

• The manufacturing division, which produces industrial packaging products such as stretch films, strapping bands and raffia tapes, is benefiting from the recovery in global industrial activity with demand increasing steadily. Management had anticipated this earlier, adding several production lines in FY09. Contributions from the new capacity will be seen in FY10 results.

• Meanwhile, despite the continued soft property market in Johor, we understand sales of Scientex’s properties have been brisk, mainly due to its successful strategy of selling lower-priced houses to young
professionals who are starting a family. The group has been averaging sales of above 100 units per month in the last three months.

• Given the robust results and positive outlook, we raise our FY10 and FY11 net profit projections by 16% and 10% to MYR48.4 mln and MYR53.5 mln respectively.

• We maintain our Buy recommendation on Scientex but raise our 12- month target price to MYR1.70 (from MYR1.50) on the back of our earnings upgrade.

• We derive our target price by ascribing a target PER multiple of 7x (unchanged) against its CY10 earnings, inclusive of a projected dividend. The target PER multiple is benchmarked against its manufacturing peers and is also within the 5x-8x PER valuation range for property companies under our coverage.

• Scientex continues to demonstrate resilience in its earnings delivery. We continue to like the group for its experienced leadership and bright prospects, underpinned by the rising demand for its industrial packaging products and residential houses. We also note that its balance sheet is lean and healthy, backed by a NTA/share of MYR1.80 and a net gearing of 0.1x as at October 2009.

• On Oct. 19, 2009, Scientex proposed to acquire Johline Realty Sdn Bhd (JRSB) for a cash consideration of MYR65.3 mln. JRSB owns two parcels of land totaling 156 acres in Mukim Pulai and Mulim Plentong, Johor. Scientex intends to replicate its success in its Pasir Gudang andKulai projects on this new acquisition, although incremental contributions are only expected in FY11 or FY12.

• Risks to our recommendation and target price include a reversal in the demand uptrend for its manufacturing division and softer-thanexpected take-up rates for its property launches.

52-week Share Price Range (MYR) 0.82 - 1.42

Major Shareholders:
Scientex Holdings Sdn Bhd 17%
Scientex Leasing Sdn Bhd 10%
Lim Teck Meng Sdn Bhd 7%

By Standard & Poors
Analyst: Alexander Chia, ACA

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