KUALA LUMPUR: Scientex Bhd's ambitious plans to enhance its capacity and capabilities for the manufacturing segment is expected to boost earnings for the company in the near future.
Affin Hwang Investment Bank Bhd analyst Brian Yeoh said the packaging manufacturer has allocated about RM300 million to add eight stretch lines over the three-years, which will increase stretch capacity by 32 per cent to about 245,000 metric tonne per annum by the financial year ending July 31, 2023 (FY23).
"Due to the shrinking demand for automotive interior products, Scientex has made an overall impairment of about RM15 million on the sub-division, and has decided to demolish the factory to make way for a robotic industrial stretch film facility," he said in a research note today.
Scientex would focus on ramping up utilisation of the Arizona plant while putting on hold expansion plans for the new Lancaster facility.
"Assuming the Arizona plant is running at 30 per cent utilisation, we estimate Scientex's US operations had contributed about 3.0 per cent of FY20 manufacturing revenue."
He said Scientex has put in more efforts in research and design (R&D), focusing on product innovation for sustainable, recyclable products to meet the latest and broader range of market applications over the long-run.
"Scientex is also expanding into the flexible plastic packaging products through its recently acquired 61.9 per cent-owned Daibochi and Mega Printing and Packaging SB, which products command better margin, compared to its lower-margin plain stretch films.
"We believe Scientex's venture is bearing fruit - manufacturing margins have expanded by 1.8 percentage points quarter-on-quarter to 11.4 per cent in the four-quarter ended July 31, 2020."
He said Daibochi has set a three-year revenue target of RM1 billion as compared to a revenue of RM619 million last year, with the capital expenditure of RM100 million to add 21 new lines.
This in will increase its production capacity to 60 per cent by financial year of 2021. To recap, Daibochi had contributed about 36 per cent of Scientex's FY20 overall earnings before interest and taxes.
Affin Hwang has reaffirmed a "Buy" call for Scientex with higher target price of RM13.20 per share, by lifting the company's FY21 and FY22 earnings forecast between 20 per cent and 28 per cent.
The forecast was made after incorporating higher contribution from both the property and plastic manufacturing segments.
"We raised our 12-month price target to RM13.20 from RM11.20. However, key downside risks to our call includes higher-than-expected resin costs, weaker export sales and weaker-than-expected property sales," he added.