Scientex's mixed property offerings to withstand slowdown

KUALA LUMPUR: Scientex Bhd, a major stretch film producer which has gone big into property development, has mixed property offerings to mitigate a potential slowdown in the sector, said managing director Lim Peng Jin. It has projects worth RM2.1 billion in outstanding gross development value (GDV).

Scientex has offerings in the affordable segment, a category major developers such as S P Setia Bhd and Mah Sing Group Bhd are shifting into in view of the larger untapped demand there.

The company's volume products in Pasir Gudang and Kulai in Johor, said Lim, feature affordable double-storey terrace houses within the price range of RM110,000 to RM150,000 a unit. "Our property offerings for the mass market are typically within the price range of the 'My First Home Scheme'," he said.

The Shah Alam-based company is also "adding more value" to its high-end property offerings on growing concerns over potential weakening demand for such properties, he said.

"We believe that some key pull factors for high-end property are concept, location and potential capital appreciation," he told The Edge Financially Daily recently.

"We have incorporated these elements into our projects, such as our niche high-end offering in Skudai, Johor, which offers eco-friendly elements and is strategically located within Iskandar Malaysia."

Malaysia's property market has come under pressure lately, with the government introducing policies to curb speculation in real estate. Banks, meanwhile, have also tightened loan approvals for new properties as well as widened the valuation discount on secondary properties.

The negative sentiment is exacerbated by the current global economic uncertainties, mainly driven by concern over the weakening US economy and the ongoing euro sovereign debt crisis.

Scientex saw operating profit contribution from its property division overtake its manufacturing unit for FY11 ended July 31. Property contributed RM62 million or 63% of the group's total operating profit of RM97.4 million with the remaining RM35.4 million from the manufacturing of stretch film and strapping band.

This came despite property contributing less to the group's total revenue. Revenue from the property unit made up 27%, or RM218.56 million, of Scientex's total revenue of RM804.02 million. This translated into an operating profit margin of 44.5% for Scientex's property business, which is considered lucrative given its wide offerings between high-end and volume products.

According to TA Securities, Scientex's property division currently has enough landbank with a total GDV of  RM2.1 billion to keep the company busy until 2019.

"Scientex has also shown defensiveness in its property division with an almost full take-up of its developments," the research house said in a recent note. "In addition, its high-end property developments command a strong 35% to 45% margin."

On the manufacturing business, Lim does not foresee a slowdown in demand for its main products, stretch film and strapping band, as they are used across various industries.

"That said, this business is susceptible to fluctuations in raw material prices, mainly resin," he said. "Our mitigation strategy would therefore be to continue improving our cost efficiency by expanding our production capacity to achieve economies of scale and target to reduce per unit costs."

Scientex has plans for further expansion in production capacity in Pulau Indah, Klang.

According to TA Securities, Scientex is raising production capacity to 120,000 tonnes, or a 20% increase by FY12 that would make Scientex the fifth largest stretch film producer in the world. The company also plans to increase its strapping band production capacity to 24,000 tonnes by the end of this year, or 50% growth.

"We have begun to introduce thinner gauge film with superior technology, that reduces the usage of raw materials yet maintains the same quality and functionality of films," said Lim.

Scientex's manufacturing business could face foreign exchange (forex) risk as 80% of its products are exported and 65% of its purchases are denominated in the US dollar.

"Fortunately for us, both our export sales and purchases of raw materials are denominated in the US dollar, which acts as a natural hedge against forex fluctuations," said Lim.

The ringgit has recently weakened rates against the US dollar in tandem with the strengthening of the greenback against the euro. The ringgit was trading at 3.15 against the US dollar last Friday.

Scientex's net profit for FY11 rose 28% to RM77.25 million from RM60.32 million a year earlier, while revenue increased 15.7% to RM804.02 million from RM694.82 million. Earnings per share rose to 35.9 sen from 28 sen previously.

The company has a relatively healthy balance sheet, with virtually zero net gearing as at July 31, 2011. Cash flow remains strong with net cash generated from operating activities rising 41.4% to RM110.53 million for FY11 from RM73.14 million a year earlier.

Scientex's current share price of about RM2.20, which gives the company a market capitalisation of RM506 million, is on par with its net asset value of RM2.17 as at July 31. The stock is trading at a historical price-earnings ratio of 6.1 times based on its earnings per share of 35.90 sen for FY11.