Scientex: Lower Margin In Packaging

Scientex FY15Q1 Financial Result

SCIENTEX	FY15Q1	FY14Q4	FY14Q3	FY14Q2	FY14Q1
Revenue	431.1	415.4	426.8	383.5	364.8
PBT	40.2	56.0	48.1	44.4	37.8
PBT%	9.3	13.5	11.3	11.6	10.4
PATAMI	30.3	48.8	37.2	33.9	29.3
Manu Rev	320.3	297.3	317.2	288.5	289.2
Manu OP	14.7	18.8	16.4	15.9	17.7
Prop Rev	110.8	118.1	109.6	95.0	75.6
Prop OP	32.0	36.9	32.5	29.3	22.2
Total Equity	769.8	712.7	686.2	649.9	635.9
Total Assets	1475.8	1400.4	1333.2	1304.4	1263.1
Trade Receivables	303.2	243.5	274.8	251.7	209.7
Inventories	83.7	109.0	82.1	76.3	86.0
Cash	102.9	83.8	56.4	89.3	91.2
Prop Dev Cost	104.0	104.6	71.8	74.4	57.5
Total Liabilities	664.7	665.0	624.9	633.3	606.8
Trade Payables	246.6	272.1	238.9	214.2	229.4
ST Borrowings	297.9	262.9	179.1	205.8	167.9
LT Borrowings	66.6	77.5	156.2	163.7	164.3
Net Cash Flow	19.1	-68.4	-95.8	-62.9	-61.0
Operation	1.5	153.5	89.5	30.9	13.5
Investment	13.2	-149.2	-106.7	-67.0	-54.1
Financing	4.5	-72.7	-78.6	-26.8	-20.4
EPS	13.69	22.09	16.43	15.34	13.27
NAS	3.47	3.22	3.10	2.94	2.88
D/E Ratio	0.34	0.36	0.41	0.43	0.38

Scientex's FY15Q1 result is a bit disappointing to me. Though quarterly revenue hit all-time high at RM431.1mil, PBT margin drops significantly from 13.5% to 9.3% thus causing its PATAMI to fall 38% QoQ to RM30.3mil.

The fall in margin is mainly due to products mix in its manufacturing segment.

However, there is a provision for forex loss of RM5mil in this quarter from USD borrowings. If it is added back to PBT, its PBT margin will be 10.5%.

From analysts report, it is said that Scientex revised the pricing in its packaging arm to increase market penetration in Southeast Asia to fully utilize its new capacity.

Balance sheet does not change much with net debt/equity ratio drops slightly to 0.34.

Free cash flow in the next 2 years might not be that great as it plans to spend RM240mil for capex. The RM40mil share subscription by Futamura has already been included in the cash flow this quarter.

It will be a challenge for Scientex to break its FY14 profit record in FY15 as property sector is expected to slow down next year. 

Scientex's property division contributes as much as 68% to its operating profit in FY15Q1, and 64% in FY14.

I'm not sure how was its property sales in FY15Q1 and I can't find its latest unbilled sales as well.

It is expected to launch RM550-600mil worth of new properties in FY15.

Anyway, while I expect its property segment to be flat in FY15, what makes Scientex interesting is its expansion plan in its packaging business.

Scientex has just completed capacity expansion for its blown film, which includes the latest 9 layers barrier films.

Its Cast Polopropylene (CPP) film plant with expanded capacity of 12,000MT per annum should be able to commence operation by the end of 2015.

In the second half of year 2016, its new BOPP film plant should also be up and running. It will increase its BOPP film capacity 10x from 6,000MT to 60,000MT per year.

While it is acceptable to lower its margin to penetrate more markets, I do hope that its revenue will increase significantly to offset the damage caused by lower margin.

As Scientex used to have better second half, I will keep my target price at RM7.75 first.

Scientex is the only stock in my current portfolio that I am confident to hold for more than 10 years.