Analysis of Mah Sing Group Berhad

Mah Sing Group Berhad (“Mah Sing“) needs very little introduction. It’s name is synonymous with property development, in Malaysia.

Yet, Mah Sing’s business can be split into two divisions: Property and Plastics.

mah sing

The business

Property 

According to its FY 2017 annual report, Mah Sing develops residential properties, commercial properties and industrial properties. It is also focused on integrated developments, where any of the above types of properties are combined, and townships.

Mah Sing’s M Vertica project in Kuala Lumpur, is an example of an integrated development, between residential and retail units. Meanwhile, M Aruna, in Rawang, is an example of a township.

Apart from the Greater Kuala Lumpur and Klang Valley,  Mah Sing also has its footprints in Penang, Johor and Sabah. You may check out all of Mah Sing’s ongoing projects HERE.

In addition to property development, Mah Sing’s other businesses, within the property division, are property management and property investment.

Without a doubt, the property division is Mah Sing’s biggest revenue contributor;  a staggering ~87% of revenue, in FY 2017.

Plastics

Little known to many, Mah Sing actually started out as a plastic trading company which then branched out into property development. Now, Mah Sing also manufactures plastic goods such as pallets, containers, furniture (plastic chairs and tables), motorcycle helmets and others.

Another company that comes to mind, because of its relation between plastics and property development, is Scientex Berhad, although Scientex Berhad manufactures plastic packaging.

Mah Sing’s plastics division contributes about 10%, in terms of revenue, in FY 2017.

Financials
DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 2915791 2957617 3108506 2904723 2,005,596
OPERATING PROFIT (RM’000) 476545 499963 453449 368748 307728
PROFIT TO SHAREHOLDERS (RM’000) 361895 361357 386677 339249 280616
SHAREHOLDERS’ EQUITY (RM’000) 3455968 3288111 3135622 2268629 1952292
DEBT (RM’000) 3677790 2924028 3471583 3027675 2620472

RATIO

DEBT TO EQUITY RATIO 1.07 0.89 1.11 1.34 1.34
OCF RATIO 0.21 0.30 -0.13 0.20 0.03
OPERATING PROFIT MARGIN (%) 16.34 16.90 14.60 12.69 15.34
PROFIT MARGIN (%) 12.32 12.18 12.37 12.22 13.92
EPS (CENTS) 12.54 13.47 15.73 18.35 21.52
EPS (ADJUSTED) CENTS 14.91 14.88 15.93 14.68 11.56
DPS CENTS 6.50 6.50 6.50 6.50 8.00
DIVIDEND PAY OUT (%) 52.75 48.26 41.32 35.42 37.17
P/E 9.17 10.62 9.22 9.17 10.50
ROE (%) 10.52 9.90 12.10 15.90 15.59

Note: Financial data may vary depending on sources.

From the table above, my valid concern is the stagnated revenue growth. In fact, revenue has dipped slightly over the last couple of years. This may be inevitable due to the weakening local property market since FY2015. It should be noted that 2015 was the year when GST was introduced.

Despite the stagnated revenue growth, operating profit margin has been improving since FY 2015. This could be the doings of a cost conscious management; which is always welcomed. Profit margin has been very stable between the 12% and 13% throughout the years in review.

Mah Sing has also been constantly paying solid dividends, for over a decade. Recently, it has been paying dividends of least 6.5 cents per share.

Potentials

Mah Sing has a substantial land bank of 2,125 acres with a potential gross development value of RM27.6 billion. This is sufficient to sustain revenue and earnings growth for another 8 years.

Hit by the property slump in 2016 and 2017, Mah Sing launched its “Reinvent Affordability” campaign, in October 2017, which entails  projects where residential units are sold under RM500,000.00. M Vertica (Cheras), M Centura (Sentul), M Vista (Penang) and Meridin East (Johor) are brainchildren of the Reinvent Affordability campaign. This is Mah Sing’s attempt to reinvigorate stagnated property sales over the recent years by targeting new home buyers, who consist of young adults. Indeed this has paid off as Mah Sing has overwhelming positive reception from the Reinvent Affordability campaign especially for M Vertica.

Although this is much a speculation on my behalf, I believe that with the anticipated removal of GST, by the PH government, young adults, in general, will have a higher disposable income to purchase homes. This would  drive up demand for housing, albeit slowly. Further, I also expect that the eventual repeal of GST will reduce Mah Sing’s construction cost because input building materials and services will no longer bear GST themselves.

Risks

Property slow-down is a risk that is still lingering the property development industry. There are many opinions regarding the slow down. My offhand observation is that there is an oversupply of housing but inadequate demand for it, due to affordability issues.

Interest rate risk is a latent risk which affects the economy, including the property market. The property market usually slows down when interest rate is high because potential homeowners have the tendency to be put off by higher repayment costs on their mortgages. In addition, a higher interest rate would affect Mah Sing’s borrowing costs, which are quite substantial.

Conclusion

Mah Sing is an experienced property developer with good financials. Being able to increase its operating profits despite a lacklustre property market is, in itself, a commendable achievement. At the time of writing, its share price of RM1.10 is a far cry from its share price of RM1.50, at the end of 2017. Value has indeed emerged.

Further, Mah Sing has been constantly paying a dividend of 6.5 cents, including for FY2017, which will ex on 12.09.2018, making it very attractive to dividend investors at its current price of RM1.10 because this equates to a dividend yield of 5.9%.

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DISCLAIMER

This analysis is published for your casual and leisurely reading and is not a recommendation to buy, sell or hold shares and must not be relied upon as a financial advice. You are encouraged to seek your own financial advice.

Reference:
  1. FY 2017 Annual Report
  2. http://www.mahsing.com.my/
  3. http://www.theedgemarkets.com/article/mah-sing-roll-out-m-aruna-township-rawang-1q18
  4. https://www.thestar.com.my/business/business-news/2017/10/26/mah-sing-launches-reinvent-affordability-campaign/
  5. https://www.thestar.com.my/business/business-news/2018/03/03/mah-sing-expects-good-takeup-rate-for-m-vertica-tower-b-in-cheras/
  6. https://www.straitstimes.com/asia/se-asia/malaysia-to-drop-gst-next-month-fulfilling-election-pledge
  7. https://www.malaymail.com/s/968077/gst-pushing-cost-home-prices-up-say-peninsular-developers
  8. https://www.thestar.com.my/business/business-news/2018/01/26/winners-and-losers-from-interest-rate-hike-by-cimb-research/

 

 

Analysis of Scientex Berhad

Dear Readers

Today we dissect Scientex Berhad (“Scientex“) to find out what it takes to be “healthy, friendly & happy”.

 

logo

Scientex consists of two main arms; the manufacturing of plastic packaging products and property development.

Plastic packaging manufacturing

Product packaging typifies the way the goods are sold. Not only does packaging secures goods, it also adds shelf life to certain perishable products and also ensures that products, such as food and medicine, remains hygienic. Moreover, packaging is often seen first before the actual product. Hence packaging gives a presentable appearance which entices buyers and also adds value to the price of the product.

In logistics and warehousing, packaging assists with warehouse organisation and space utilisation. Imagine a scenario where boxes, containing goods, are stacked on a pallet. In order to utilise space efficiently, boxes may be required to be stacked vertically. But staking boxes vertically may increase the risk of the boxes collapsing. However, when the boxes are secured by using a stretch film, the risk of boxes collapsing drops significantly. Hence, efficiency is space utilisation translates to profit.

1200px-Pallet_wrapper
Stretch film wrapping machine in action. Credit: Wikipedia

The point in which I am proposing is that plastic packaging is a vital component of the clockwork of consumerism. And Scientex, being at the forefront of plastic packaging manufacturing, is able to cash in on consumerism.

Scientex produces a variety of plastics packaging. They can be grouped into 4 broad categories:

  1. Industrial packaging.
  2. Consumer packaging.
  3. Automotive interior.
  4. Green Energy products.

Industrial packaging includes, among others, stretch films (to wrap around pallets), woven bag (bags to store fertilizers, animal feed, cement, etc), raffia string and FIBC bag (basically supersized tote bags which can fit up to 500kg -1000kg of materials).

bnr_strecthfilm01
Scientex  has the reputation as the largest stretch film producer in Asia Pacific and stretch film is the core of the manufacturing division. Credit: Scientex Bhd.

On the consumer side, Scientex’ manufactures plastic wrapping and packaging for breads, beverages, ramen/instant noodles, fresh food products and feminine products. It also provides the printing services for the wrappers and packaging.

Scientex produces polymer products and skin materials from PVC or thermoplastic polyolefin (“TPO“) sheets for the automotive sector which are used to wrap, among others,  seats, dashboards, door trims, consoles and armrests giving those items a leather-like appearance and touch. Its clients are mainly Japanese (Toyota, Honda, Subaru, and Suzuki), American (Ford and GM) and local (Proton and Perodua) automotive manufacturers.

On the green energy front, Scientex manufactures films or ethylene vinyl acetate (“EVA“) films which encapsulates solar cells, in solar PV modules. Its functionality is to prevent humidity and dirt from affecting the performance solar cells.

Overall, the manufacturing of plastic packaging represents about 70% of Scientex’s revenue. Notwithstanding that, manufacturing contributed only 30% of Scientex’s operating profit, in FY2017. That accounts to about RM97 million of RM325 million operating profit; translating to a razor thin operating profit margin of about 4%.

Close to 75% of manufactured products were exported overseas where main markets , in terms of revenue contribution, include Japan (21%), followed by Korea (11%) and Indonesia (6.7%), as per FY2016 annual report.

Property development

Scientex’s property development division is a major contributor to top line despite the absence of any synergy between said and the plastic manufacturing division.

Scientex’s property development division focuses on landed housing developments in suburbia across Johor, Melaka and Perak. These property developments consist affordable housing, like Scientex Kulai, Scientex Klebang and Scientex Senai, to luxurious housing developments,  such as Scientex Skudai and E’roca Hills (Kulai).

The gross development value of all of its projects is about RM1.5 billion.

Despite recording less revenue (about 30% of revenue), property development contributed 70% of Scientex’s FY2017 operating profit. Hence, RM227.5 million of operating profit was generated from property sales, in FY2017. That represents an operating profit margin of about 9.5%.

Financials
DATA 2017 2016 2015 2014 2013
REVENUE (RM’000) 2,4031,51 2,200,980 1,801,684 1,590,472 1,229,045
OPERATING PROFIT (RM’000) 325,069 312,560 224,978 189,620 146,104
PROFIT TO SHAREHOLDERS (RM’000) 255,873 240,865 158,190 148,450 110,284
SHAREHOLDERS’ EQUITY (RM’000) 1,535,464 1,175,167 941,978 712718 628,665
DEBT (RM’000) 973,909 1,009,439 635,113 664,955 637,732

RATIO

DEBT TO EQUITY RATIO 0.63 0.86 0.67 0.93 1.01
OCF RATIO 0.43 0.53 0.38 0.28 0.49
OPERATING PROFIT MARGIN (%) 13.53 14.20 12.49 11.92 11.89
PROFIT MARGIN (%) 10.64 10.94 8.78 9.33 8.97
EPS (CENTS) 54.83 105.88 70.43 67.12 51.04
EPS (ADJUSTED) CENTS 52.91 49.81 32.71 30.70 22.81
DPS CENTS 16.00 22.00 22.00 21.00 26.00
DIVIDEND PAY OUT (%) 29.18 20.78 31.24 31.29 50.94
P/E 16.14 5.95 10.01 10.35 10.75
ROE (%) 16.75 20.72 16.89 20.84 17.97

Scientex has a lot going for it in the past 5 years. During that time, its top line has been increasing exponentially to a point that it doubled. No small feat indeed.

In August 2016, Scientex underwent a corporate exercise in the issuance of 1:1 bonus issue of shares. As such, there was a dilution in earnings per share, seen in FY2017.

By my calculations, earnings growth rate, is at 18.9%, throughout the years under coverage. However, to achieve such a high rate of growth, the company had to increase its borrowings. Debt is being used to, improve production in its local plants, fund the expansion of its manufacturing operations in the US, and acquire land to sustain its property development.

As a result of higher short-term borrowings, Scientex’s operating cash flow has been pretty tight. However, it is not a cause for concern for a growing mid cap company.

Insofar as dividend is concerned, Scientex paid decent dividends of an average of 20 cents per financial year under coverage; except in the FY2017, where it paid only 16 cents. Dividend payout is very erratic in my opinion as it ranges from 50% – 20%.

Potentials in  manufacturing 

The Nano6 stretch film which are manufactured by Scientex is still competitive in many ways. It is touted as one of the world’s thinnest stretch films. The film is light, thin, more durable and offers a good transparency (making barcode scanning less cumbersome). Nano6 may be the driving force for the production and sales of stretch films and it is surely worth keeping tabs on it.

Scientex’s collaboration with a Japanese company, Futamura Chemical Co. Ltd, in 2016, led to the construction of Malaysia’s biggest biaxially-oriented polypropylene (“BOPP“) film production plant in Pulau Indah, Selangor. The plant is said to have a capacity of 60,000 tonnes. However, it will only be operating at half of its maximum capacity by the end of 2017. While most of its productions are exported to Japan, there is a strong local demand for BOPP which Scientex is looking to exploit. At the moment, Malaysia imports much of its BOPP needs from overseas.

The US remains an untapped market for Scientex. That market only contributes nominally to Scientex sales; less than 1% of exports of plastic packaging. However, things are about to change when Scientex completes its production plant in Arizona. The plant is slated to manufacture stretch films (presumably Nano6) for the US market.  The plant has a maximum output of 30,000 tonne of stretch films per annum and is expected  to boost Scientex’s overall manufacturing capacity of stretch films from 150,000 tonnes per annum to 180,000 tonnes per annum. This expansion will be completed in the end of 2017 with a cost of about USD25 million. Commercial rollout is expected in the first quarter of 2018.

I have mixed feelings about this expansion since the US market only contributes nominally to Scientex’s sales. I foresee Scientex having to spend time and money to develop supply and logistics chains while incurring marketing expenses to build a customer base in the US. As a result, meaningful contribution, if any, can only be seen sometime in FY2019 or FY2020. However, the abundance of shale-gas based resin, for raw material, and savings in logistics, and supply chain, are potential upsides to this venture.

Potentials in property development 

Scientex has purchased 26.4 hectares of freehold land in Rawang. The land is located in the greater Klang Valley region and costs RM85 million. The purchase will only be completed in the first half of 2018. With the addition of the Rawang land, Scientex’s land bank now stands at 1,093 hectares (as at August 2017) and is able to sustain the company for 10 to 15 years.

There are a couple of housing development which will be unveiled in FY2018 for bookings. These projects are located in Durian Tunggal, Melaka (197.4 acres) and Kulai, Johor (121.2 acres).

With many high end developments slowing down, the affordable housing segment, which has been the main thrust of Scientex, continues to enjoy breeze sales due to high demand and affordable pricing. Having survived the general slowdown in the property market in 2017, I expect the property market, in 2018, to be kind to Scientex due to a good mix of affordable housing along with other premium developments.

Conclusion

Scientex is appealing, in my opinion, for the following reasons:

  1. It has a strong reputation and achievements in the plastic packaging industry, especially in the industrial packaging segment.
  2. It is expanding its consumer packaging segment, especially in the BOPP production.
  3. Strong presence in property development with a focus on affordable housing.
  4. Strong access to new packaging and plant technology from Japan and Germany.
  5. Keeping up with reinvestment, by modernising and expanding plants, and replenishing land bank.

I find Scientex unattractive for the following reasons:

  1. US expansion is a big gamble considering that, in my opinion, it has been a market in which they have neglected thus far.
  2. Its expansion and modernisation of plants and equipment may endure a gestation period of a couple of years before there can contribute positively to earnings.
  3. Profit margin in the manufacturing business is already tight even in an environment of low crude oil prices.
  4. Scientex’s share price is selling at a premium. Its fair value, from my calculation (which may well vary yours), is within the range of about RM7.40 – RM7.60 per share.

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Disclaimer

This analysis is published for your casual and leisurely reading and is not a recommendation to buy, sell or hold shares and must not be relied upon as a financial advice. You are encouraged to seek your own financial advice.

Reference:
  1. Scientex website
  2. Scientex FY 2016 Annual Report
  3. Scientex Q4 FY 2017 Report
  4. https://en.wikipedia.org/wiki/Stretch_wrap
  5. https://vimeo.com/147704702
  6. http://www.thestar.com.my/business/business-news/2016/11/11/scientex-to-build-rm107mil-stretch-film-plant-in-arizona/
  7. https://www.thestar.com.my/business/business-news/2016/11/10/scientex-to-invest-us$25m-for-stretch-film-plant-in-us/
  8. https://www.thestar.com.my/business/business-news/2017/03/24/scientexs-us-bet/
  9. https://themalaysianreserve.com/2017/06/21/scientex-plans-double-packaging-plant-capacity/
  10. http://www.theborneopost.com/2016/09/30/scientex-starts-operations-of-malaysias-largest-bopp-film-manufacturing-plant/
  11. http://www.thestar.com.my/business/business-news/2017/08/09/scientex-boost-landbank-with-rawang-tract/