7 things I learned from the 2019 Scientex AGM

Scientex Berhad’s core business spans across two segments, namely manufacturing and property. Scientex is involved in the manufacturing of stretch films, custom films, specialty products, and flexible plastic packaging with factories in Malaysia, Vietnam, Myanmar, and the U.S. It is also a property player with a focus on affordable housing segment in Peninsular Malaysia.

Scientex’s acquisition spree continued apace in 2019. It is the single largest shareholder of Daibochi Berhad, a flexible plastic packaging (FPP) manufacturer, when it acquired a 61.9% stake in Daibochi in March 2019. Through Daibochi, Scientex also acquired Mega Printing & Packaging Sdn Bhd, another FPP player, in August 2019.

Here are seven things I learned from the 2019 Scientex AGM:

1. Revenue increased 23.1% year-on-year from RM2.6 billion in 2018 to RM3.2 billion in 2019. The manufacturing segment – comprising stretch films, custom films, specialty products, and FPP — recorded a revenue of RM2.4 billion in 2019 compared RM1.9 billion the previous year. The improvement is due to the higher utilisation rates across its manufacturing plants as well as contributions from the newly acquired Daibochi. In 2019, Scientex’s overall utilisation rate stood at 65% across its 19 plants with a combined manufacturing capacity of 460,000 metric tonnes per year. Gross profit margin of the manufacturing segment stood at 13.3% in 2019. The gross profit margin of each product line was not disclosed However, the revenue breakdown of each respective product line is as follows:

Product LineRevenue (RM million)
Stretch film793
Custom film1,038
Specialty products340
Converting (FPP)187*

*Comprising five months’ results from March to July 2019 (Daibochi post-acquisition)

The property segment posted a revenue of RM889.6 million in 2019 compared to RM698.2 million in 2018. This was due to the good take-up rates of their new property launches.

2. As revenue improves, Scientex’s net profit followed suit by growing 17.3% y-o-y to RM333.7 million in 2019. The management foresees both two segments to play an equal role in contributing to the bottomline although Minority Shareholder Watchdog Group (MSWG) pointed out that the property segment contributed to 62.1% of consolidated profit.

3. Managing director Lim Peng Jin shared that Scientex’s factory in Pulau Indah adopts a just-in-time model by keeping no inventory. The factory only starts manufacture when an order is confirmed by the client in order to keep inventory costs low. Scientex will duplicate the same model to build up volume in the crowded stretch film market in the U.S. and gain market share subsequently. Lim continued to add that any changes in raw material prices (i.e. plastic resins) for the manufacturing segment will be passed on to their customers.

4. The customers of Scientex’s listed subsidiary, Daibochi, include Nestle, Mars, and PepsiCo. In this case, Lim said that Daibochi has to keep inventory for these multinational corporations. At the same time, Daibochi fetches a higher margin compared to Scientex’s manufacturing segment.

5. Lim answered a shareholder that Scientex has about RM700 million worth of unbilled sales — sales that are locked in but not yet captured in the books — from the property segment. These unbilled sales can provide investors with some earnings visibility in the short term. Scientex will continue to focus on the affordable housing segment as the demand for affordable housing remains resilient, and may consider venturing into the higher-end segment if the relevant demand grows.

6. Other expenses amounted to RM21.2 million in 2o19; there were none in 2018. The management explained that the items were due to realised and unrealised losses on foreign exchange from the weakening Malaysian ringgit. In 2018, Scientex recorded gains on foreign exchange which was reported under other income that year. On a separate note, the management will ensure its net gearing ratio does not exceed 0.5 (net debt over equity attributable to owners as defined by Scientex).

7. With the growing environmental impact caused by plastic, Lim stressed that plastic is only an issue if it is used and thrown away but not when it is recycled. Scientex is working with multinational corporations to commercialise mono-layered flexible packaging to replace complex ones in order to ease recycling. Lim used a plastic bottle as an example. Right now, a bottle can only be recycled if the cap, the body of the bottle, and the labelling are recycled separately as they are made up of different plastic materials. Scientex produces up to 250,000 tonnes of plastic annually, most of which are recyclable. On the other hand, Daibochi and Mega use more multi-layered packaging with several plastic materials which makes recycling harder. The recyclable content of Scientex’s plastic packaging is between 5% to 8%. Scientex has also lowered material usage over time by reducing the thickness of its stretch film by about 75% from 23 micrometres 20 years ago to six micrometres in 2019.

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Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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