Today's outlook 20-Dec-2010

Last Friday, US market ended flat with DJIA down 7.34p to 11491.90p while S&P gained 1.04p to 1243.91p.

Here are some of the news that may have affected last Friday's US market:
ii) Oracle reported quarterly profit which rose 28% yoy
ii) RIM revenue jumped 40% yoy
iii) Volatility Index has gone down to its 8 months low
iv) Bank of Montreal will buy Marshall & IlsleyCorp for US$4.1b
The major news during the weekend is the news that South Korea plans levy on foreign currency bank debt.


My view:
Overall, US market was flat with the news flow are mostly related to US local economy. However, the robust financial result from Oracle and RIM are positive for technology counters. The South Korea plan is generally negative to equity market but the impact should not be as high as China, due to their smaller GDP. Overall, today should be slightly bearish for KLCI as investors are likely to stay cautious while waiting for further indicators.

Stocks that I STILL find attractive:

1. SCIENTX (Hit RM2.00 on Friday close, capex of RM14.4m in FY2011 should grow the Manufacturing earnings by 10%, still cum 6 sen dividend ex date 7-Jan-2011, new potential: may go up to RM2.16)
2. DRBHCOM (HwangDBS Target Price at RM3.55, historical PER of 7.49x now means it is still trading at huge discount compared to other conglomerates in Malaysia, got potential to go up to RM3.00)
3. FPI (Trade at attractive historical PER of only 5.92x, strong balance sheet with net cash of RM81.42m or 33.14 sen per share, got potential to go up to RM1.39)

SCIENTEX revisited

First, let's identify the Manufacturing segment.

This is from Business Times:

Speaking to reporters after Scientex's shareholders meeting in Subang Jaya yesterday, Lim said with the installation, the plant now boasts eight lines with annual production capacity of 100,000 tonnes of stretch films, an increase of 15,000 tonnes from before.

Previously, I am estimating SCIENTX Manufacturing value to be RM217.61m by using 8x PER and historical earnings. Based on the Company's plan to invest RM14.4m for line expansion, the Manufacturing segment earnings should be able to grow 10%.

By keeping 8.0x PER, Manufacturing segment should worth RM239.37m.

Second, let's identify the Property segment.

These are the lands owned by SCIENTX for Property segment (Source: Annual Report 2010) :

If you look at it carefully, the land at Taman Scientex was last revalued in 1993. Logically, after 17 years that piece of land should worth a lot more than its Book Value.

Based on my simple assumption that each year all the land value increase by 3% annually, the RNAV for SCIENTEX land should worth RM258.07m.

Again, by using SOP, SCIENTX has potential to go up to RM2.16.

SCIENTX hit RM2.00

I have written on Scientex 2 days ago, the link is here SCIENTX 1st Time Report.

The stock has really moved to RM2.00 (Meaning to say it hit my estimated potential of RM1.99 already).
If you look at the increasing volume, it shows that more investors are looking into this stock. However, RM2.00 may act as short term psychological barrier.

I will keep on watching this stock and temporary keep my estimate at RM1.99. However, my recent check on the news about this Company revealed 2 more catalysts which may be positive to the stock:

i) SCIENTX is planning to spend RM18m to increase capacity where investments will cover facilities for both the stretch film and strapping band. This is gathered from Business Times report, you can read the full report in this link.
My view: My earlier estimate on the earnings for the Manufacturing segment may have been too conservative as I have not factored in the new facilities which should then increase production. Will need to recalculate the value of the Manufacturing segment.

ii) It is also mentioned in the report that "As for property development, Lim said Scientex has several townships and mixed development projects in hand, namely in Pasir Gudang, Kulai, Skudai and Ayer Keroh, with a gross development value of RM1.8 billion". To my best knowledge, the land price in Johor should have increased. Will need to estimate the worth of their land using Revised Net Asset Value (RNAV) to capture the latest worth of SCIENTX land.

Valuation:
Keep the best part first... to be revealed on Sunday.

Scientex Berhad

Key Points:

• Price at RM1.89 as of 15-Dec-2010 close. Undemanding PER of 7.21x only
• Paid 9 sen dividend in FY2010, representing historical dividend yield of 4.76%
• One of the world’s largest producers of stretch film
• Property division is an exposure to Iskandar theme investment with projects in Kulai and Pasir Gudang Johor
• Potential to increase to RM1.99 (by using Sum Of Parts to value Manufacturing & Property division of the business)

 1. Company Background

Established in 1965, Scientex Bhd (SCIENTX) is mainly involved in manufacturing and property development. 

A. Manufacturing 

The Company's manufacturing division comprises of two business units namely packaging and polymer. For packaging, SCIENTX produces various packaging products designed for outer, middle and inner packaging applications:-

• Outer packaging – stretch film, stretch hood, PP strapping band and HDPE tying tape.
• Middle packaging – woven bags, bulk bags (FIBC) and corrugated carton boxss.
• Inner packaging – adhesives, lamination film and PVC rigid film.

It is worth to note that SCIENTX is one of the world’s largest producers of stretch film, with an annual production capacity in excess of 10 billion metres.

For polymer, SCIENTX manufactures PVC leather cloth, PVC/PP & PVC/PE foam and TPO/PP foam sheets for automotive instrument panels, door trims, and headlining for car manufacturers. Lastly, SCIENTX also supplies tufted carpet mats to automotive manufacturer. SCIENTX clients for this division originated mainly from Asia Pacific region.

B. Property

SCIENTX flagship development is located in Pasir Gudang, Johor with land area of 1,100 acres. Over the last 15 years, more than 5,000 units of residential and commercial properties has been built. Besides, the Company also has development project in Kulai. The project in Kulai comprises of 250 acres of residential and commercial development and was launched in early 2008. This is in line with SCIENTX strategy to acquire and develop strategically located prime land within the Iskandar Malaysia growth corridor in Johor.


2. Corporate Structure

3. Management

The company's Managing Director is Mr. Lim Peng Jin who has been with the Company for 19 years. Appointed to the Board on 20 January 1995 as the Group Executive Director, he was later re-designated as Managing Director on 6 November 2001. He graduated with a Bachelor of Science (Honours) in Chemical Engineering from the University of Tokyo, Japan in 1990. He had also completed a course in Programme for Management Development at Harvard University, USA in 1998.

Other management team members are experienced in their respective fields. For Manufacturing Division (Packaging), there are 3 Executive Directors namely Mr Gan Kok Khye, Mr Choo Seng Hong and Mr Thomas Leong Choo Chye. As for Manufacturing Division (Polymer), the General Manager is Mr Goh Tian Chin. For Property Division, the Executive Director is Mr Koay Teik Chuan.

4. Financials


In FY2006 (ending 31-July), SCIENTX registered revenue of RM586.32m. This has grown to RM694.82m in FY2010. However, net income grow at Compounded Annual Growth Rate of 20.6% from RM28.47m (FY2006) to RM60.32m (FY2010).


For FY2010, revenue has increased 36.3% to RM694.82m while Profit Before Tax or PBT up 68.3% to RM70.75m. The higher PBT was attributed to higher revenue and profit margin achieved by both manufacturing and property divisions.


5. Quarter 1 for FY2011 released after market close today at 15-Dec-2010

For 1Q2011, SCIENTX net income up 33.60% y-o-y to RM17.01m. The decline q-o-q is not a major concern as 1st Quarter is normally weaker as seen in 1QFY2010 and 1QFY2009. If we annualized the 1Q net income, total net income for FY2011 should be around RM68.04m or 31.59 sen. 

6 sen dividend has just been approved in the AGM. Ex-date is 7-Jan-2011.

6. Valuation


Since SCIENTX has both manufacturing and property division, there are 3 ways to value SCIENTX.


Method 1 (treat it as packaging company): 
If we use DAIBOCHI historical PER of 8.0x to annualized FY2011 EPS of 31.59sen, SCIENTX value is RM2.53 (33.9% upside)


Method 2(treat it as property company): 
If we use KSL Price to Book Value ratio of 0.86x, SCIENTX value is RM1.73 (8.5% downside). However, the more proper way is to value this is via RNAV method.


Method 3 (Sum of Parts - break into 2 components)
This method gives value of RM1.99 per share (5.3% upside). The details is shown below:

My view:


I believe that the Sum Of Parts valuation is most appropriate. Coincidentally, RM1.99 is also the psychological barrier for the stock. Conclusion: got potential to go to RM1.99 as the short term target. Let's see how this counter goes tomorrow...