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15 things to know about Scientex before you invest (Updated 2018)

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Established in 1968, Scientex Berhad has grown into a conglomerate that derives income from two core business segments.

  1. manufacturing a wide range of plastic packaging products which it exports to clients located in more than 60 countries worldwide
  2. A reputable property developer with a number of projects concentrated mainly in Johor, Malaysia.

For many years, Scientex has been a darling for growth investors. This is due to its impressive track record of delivering a strong set of financial results year after year which had led to a long-term appreciation in its stock price. As I write, Scientex is worth RM4.3 billion in market capitalization — around 31 times its market cap of RM135.7 million in 2009.

Recently, Scientex released its latest 2018 annual report. I took the liberty to go through it and, in this article, I’ll give an update on its performance over the last 10 years, its latest growth plans, and valuation metrics.

Here are 15 things to know about Scientex before investing:

Manufacturing

1. In 2018, Scientex streamlined its manufacturing operations and recategorized its product range into three categories:

stretch filmscustom films, and specialty products.

Presently, it runs 15 manufacturing facilities located in Malaysia, Vietnam, and the United States with a production capacity of 450,000 metric tons (MT) per year, up from 356,000 MT in 2017.

2. In the last 10 years, Scientex aggressively expanded its production capacity and product range through strategic acquisitions.

In total, the company invested RM663.8 million in acquiring subsidiaries during the period. Here is a list of its major acquisitions:

Major Subsidiaries Stake Date of Acquisition Cost (RM millions)
Scientex Packaging Film Sdn Bhd 100% 14 Jun 2010 99.34
Scientex Tsukasa (Vietnam) Co. Ltd 75% 16 Jul 2010 10.85
Great Wall Plastic Industries Bhd 100% 8 Jan 2013 283.20
Scientex Great Wall Sdn Bhd 100% 13 Feb 2014 39.00
Scientex Advance Sdn Bhd 100% 11 Aug 2015 58.00
Klang Hock Plastic Industries Sdn Bhd 100% 2 May 2018 190.00

Source: Scientex Bhd annual reports

3. Subsequently, Scientex embarked on an ambitious plan to increase the production capacity of its facilities that were owned by its newly-acquired subsidiaries, particularly over the last five years.

In addition, Scientex set up two new facilities and increased its production capacity. Here is a list of projects that have been completed with operations commencing since 2016:

Product &
Location of Plant
Production Capacity (2014) Production Capacity (2018) Commencement
Period
CPP Film, Melaka 0 MT 12,000 MT Jan 2016
BOPP Film, Pulau Indah, Klang 6,000 MT 60,000 MT Dec 2016
PE Film, Rawang, Selangor 24,000 MT 84,000 MT End-2017
Stretch Film,
Phoenix, USA
0 MT 30,000 MT Jan 2018

Source: Scientex Bhd annual reports

4. Hence, Scientex’s manufacturing division has experienced rapid growth in both sales and profits over the last 10 years.

Sales increased from RM428.4 million in 2009 to RM1.90 billion in 2018. This resulted in growth in segment profits from RM21.8 million in 2009 to RM126.9 million in 2018.

Source: Scientex Bhd annual reports

Property development

5. Scientex began its venture into property development in 1995 to diversify its sources of income.

Since then, this division has built and delivered more than 17,000 affordable homes located primarily in Johor, Malaysia. For the last five years, Scientex has been actively growing it land bank as it envisions to deliver 50,000 affordable homes by year 2028. As I write, it has accumulated 3,265 acres of land in Johor, Melaka, Selangor, and Perak. Here is a list of development land which have been acquired by Scientex over the last three years, which would be developed over the next 10 years:

Location Year Size
(Acres)
Cost (RM millions)
Pulai, Johor 2016 322.86 232.21
Pulai, Johor 2016 10.52 8.77
Durian Tunggal, Melaka 2017 197.40 45.70
Pulai, Johor 2017 2.89 2.01
Hulu Kinta, Perak 2017 Plot 1: 14.38/Plot 2: 55.00 70.27
Pulai, Johor 2018 335.57 293.80
Rawang, Selangor 2018 65.33 87.94
Kulai, Johor 2018 121.20 127.37

Source: Scientex Bhd annual reports

6. Scientex’s property division has reported rapid growth in both revenue and profits in line with the increasing demand for affordable properties in Malaysia.

Its revenues have risen from RM81.3 million in 2009 to RM722.2 million in 2018. This resulted to higher segment profits from RM20.7 million in 2009 to RM237.5 million in 2018.

Source: Scientex Bhd annual reports

Group financials

7. Scientex has achieved an impressive CAGR of 20.0% and 25.5% in revenue and shareholders’ earnings respectively over the last 10 years.

From 2009 to 2018, revenue increased from RM509.7 million to RM2.63 billion, and shareholders’ earnings grew from RM37.5 million to RM289.8 million.

Profits have increased faster than sales because Scientex’s property segment — which has higher profit margins — has grown faster than its manufacturing segment during the period. Overall, Scientex has a 10-year average return on equity of 16.6%.

Source: Scientex Bhd annual reports

8. As at 31 July 2018, Scientex has long-term liabilities of RM405.7 million and a gearing ratio of 23.0%.

Over the last 10 years, Scientex has generated RM1.97 billion in positive cash flows from operations and raised RM527.90 million in net long-term debt and equities. Out of which, the company has:

  • Invested RM784.7 million on capital expenditures
  • Invested RM882.5 million in acquiring land for property development
  • Invested RM663.8 million in acquiring subsidiaries
  • Paid RM417.1 million in dividends to shareholders

Evidently, Scientex has been efficient in generating cash flow from its business operation, using it to rapidly expand operations, and reward its investors with consistent dividends.

Source: Scientex Bhd annual reports

Growth drivers

9. The first phase of a stretch film manufacturing plant in Phoenix, USA has been commissioned with a production capacity of 30,000 MT per annum.

As I write, Scientex is working on Phase 2 of the project. It is expected to be completed by 2019 and will double its production capacity to 60,000 MT a year.

10. In 2 May 2018, Scientex completed its acquisition of Klang Hock Plastics Industries Sdn Bhd (KHPI).

For the past three months, KHPI has generated RM96.6 million in revenue and RM5.69 million in shareholders’ earnings. KHPI will contribute its first full year of financial results in 2019.

11. On 15 August 2018, Scientex acquired two plots of freehold land measuring 208.9 acres in Alor Gajah, Melaka for RM68.2 million.

They are located close to its existing Durian Tunggal development and are acquired with the intention of property development in the future.

Valuation

12 .P/E ratio: As at 8 November 2018, Scientex is trading at RM8.84 a share. In 2018, it reported earnings per share of RM0.596. Hence, its current P/E ratio is 14.83, near its 10-year high of 15.74.

13. PEG ratio: In Point 7, I mentioned that Scientex has grown its earnings by 25.5% annually over the last 10 years. Hence, its current PEG ratio is 0.58. As it is below 1.0, the company is considered undervalued based on the PEG ratio.

14. P/B ratio: As at 31 July 2018, Scientex has a book value per share of RM3.61. Thus, its current P/B Ratio is 2.45, close to its highest in 10 years.

15. Dividend yield: In 2018, Scientex paid out RM0.20 in dividends per share. If Scientex maintains its dividend at RM0.20, its dividend yield is 2.26% based on its latest share price of RM8.84. This is lower than the 3% in fixed deposit rates offered by Malaysian banks presently.

The fifth perspective

Scientex has built a track record of solid growth over the last 10 years. As a result, its stock price has grown tremendously with its market capitalization growing 31 times in that period.

At the moment, Scientex is probably on the expensive side. If you are investing for dividends, you can probably find many stocks that offer a better yield. And if you are investing for capital gains, then Scientex’s current P/E and P/B ratios are near their historical highs.


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