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Can Scientex smash its RM10 bil revenue target?
Emmanuel Samarathisa 
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Mention the name Scientex Bhd, and most market participants will immediately think of stretch films. But behind the brand lies an extraordinary story of a homegrown venture that has been incrementally growing since its founding in 1968.

Moreover, the company’s recent performance on Bursa has been nothing short of phenomenal. With the insatiable appetite of its group managing director Lim Peng Jin, the company is maintaining its steady growth trajectory. For Lim, taking Scientex to its current RM4 bil market capitalisation is not something he is satisfied with. While it is an enviable position to be in, Lim wants to take the company further.

He has bold, perhaps even daring, ambitions for Scientex: to be a RM10 bil company by 2028 and to build 50,000 affordable homes.

How will Scientex pull off this feat? Is it even possible? As unbelievable as it may seem, Lim thinks it is achievable, given that he has met all his previous goals.

“We believe in setting stretch goals. In 2009, after the financial crisis, we said we wanted to double up in five years. So, we made a very clear and common goal for everyone in the company,” Lim tells FocusM. “We worked hard towards that and we did it. It was a very nice accomplishment.” What happened next is even more remarkable.

“We doubled up three years later. Today we are roughly RM4 bil in size and can take on bigger projects and invest 10 times more. So it’s a scale-up kind of expansion,” Lim explains.

Not bad for a company that started off as a humble manufacturer of PVC leather cloth and sheeting. It is now Asia’s largest stretch-film maker.

More than that, the company also survived the financial crisis of 1997-98 when most other companies were struggling. Scientex also withstood the test of the global slowdown in 2008/2009 due to the subprime crisis in the Unites States.

Today, the company has presence in three countries: Malaysia, Vietnam and the US. By 2013, the company had smashed its RM1 bil revenue milestone, and followed up by posting a RM2 bil revenue three years later. Moreover, the company also ventured into property development, expanding its repertoire of services.

Scientex saw its net profit for 4Q ended July 31, 2018, rise to RM88.3 mil on the back of revenues of RM733.2 mil, up 22.4% and 13.5% respectively. For its full FY18, net profit was up 13.3% to RM289.8 mil, while revenue rose 9.3% to RM2.63 bil.

 

A hands-on approach

The company’s “scale up” expansion strategy has its roots in the leadership style of Lim, who joined Scientex when the company’s revenue was just RM60.6 mil. But having embraced a hands-on management style, Lim immediately worked on scaling up the business. He hit the ground running by joining trade exhibitions and conferences. He also organised meetings and networking sessions with major industry players. It is believed that 97% of Scientex’s businesses today were built by Lim.

This tenacity is also reflective of Lim’s personality where at a recent business meeting he shared about his passion for outdoor activities such as trekking and mountain climbing. But his vision for a more dynamic company seems to be paying off. In fact, some of its investments and acquisitions, especially the purchase of plastics packaging firm Klang Hock Plastics Industries (KHPI) for RM190 mil in 2016 have begun to pay off. “If you look at the results we recently announced, all these things are due to the seeds that we had planted earlier,” he says.

“We invested and built up our plants. Recently, we acquired KHPI, and those results came in last quarter. So, all the expansion and investment that we have put in, contributed to the positive results that we have recently shown.”

Three other factors helped drive profitability for Scientex: higher sales volume in the manufacturing segment, higher utilisation of its plants in Malaysia and increased total annual output capacity from 356,000 tonnes in FY17 to 450,000 tonnes in FY18.

 

Not satisfied yet

But Lim wants more. The next goal, he says, is to reach plant utilisation of up to 70%. “This new company we acquired, KHPI, we only incorporated three months of its results. In 2019, we are going to incorporate a full year. So, the higher usage will automatically come in,” he says. “Then there is the new plant in Arizona. Because it is new, there are some challenges especially in getting the sales in. But it is slowly and steadily growing day by day, because it is a huge plant. So, we are not expecting a full run overnight.”

Lim is referring to the setting up of the US stretch film facility two years ago, a move that cost RM107 mil in capital expenditure. It is the group’s first stretch film plant overseas and he is giving the production unit “some two to three years” to become an effective and efficient machine. It is indeed a shrewd move to set up a plant in the US.

Kenanga Research analyst Marie Vaz notes the bulk of Scientex’s revenue is expected to come from the group’s factory in the US. “We do not expect additional capacity in FY19-20 for now, but growth is premised on gradual improvements in utilisation rates for the manufacturing segment, and (ii) full-year contributions from KHPI in FY19,” she says in a note.

Others analysts such as Damia Othman of TA Securities recommends a “hold” for the company. She also notes some potential risks. “We believe potential risks to the group would include: i) increasing crude oil price which will increase cost of sales; ii) ringgit strengthening therefore reducing export competitiveness; and iii) softening of the property market in Malaysia,” she says.

Vaz of Kenanga is also not “overly bullish” on Scientex’s property segment due to macro-economic uncertainties, despite it being a major contributor to the group’s earnings.

 

Bucking the trend

Lim, however, is unfazed. Scientex’s property segment contributed RM722.2 mil to the group revenue for FY18. Its slew of new launches in FY18 has a gross development value (GDV) of RM1.2 bil, bringing the GDV of ongoing and future developments to RM13.5 bil.

“We’ve been doing this for 20 years,” he says. Scientex first entered the property sector in 1995. But then came the Asian financial crisis. “If you remember 1998, things were bad and the entire (property) segment was stuck. We were struggling.”

The company then doubled down and studied the market carefully. “We found a lot of people were wanting or needing to buy a house,” Lim adds. “The problem was, they cannot afford to buy a house. So if you can make the price affordable, there will be a lot of buyers.”

This spurred Scientex to launch 600 double-storey houses in 2001 and priced them at RM89,000 in Pasir Gudang, Johor. “We sold all the units overnight,” says Lim. “So the question is, can you sell at RM89,000 and still make 20-30% profit? This is where we concentrated our efforts on.” To date, Scientex has built 16,391 homes and what sets the company apart from most property developers, in Lim’s words, is that the company thinks like a manufacturer.

“We standardised the house design. Because land is expensive, we reduced the land size. But we still deliver double-storey houses with a built-up of 1,000 to 1,200 sq ft,” he says. “We also shortened the construction period, so these things drive costs down. That has been the competency that we’ve built over the years.”

Scientex has built homes from Johor all the way up to Perak. Most recently, the company unveiled its latest township development in Senai, Johor, the 48.88ha (121-acre) Taman Scientex Utama with an estimated GDV of RM1.3 bil.

 

Weathering externalities

Given Scientex’s exposure to the international market, two developments might give the company a run for its money. Firstly, the tense US-China trade war may yield some good news. “We are seeing more enquiries for our products,” says Lim. “We have people who might find it difficult to import from China and they are looking for supplies in Southeast Asia. Also, we have our US factory, and some people are finding it a challenge to import to the US. So this is an obvious advantage we have here.”

Scientex also benefits from a lower corporate tax in the US, which at 21% is even lower than Malaysia’s, making this another plus factor, according to Lim. “That’s the reason we recently expanded further in the US. We have two lines and we just added another line over there.”

But the steep labour costs in the US were posing challenges for the company, says Lim. To overcome the problem, he looked to automation. “So with this new line, we rely on robotics and it is fully automated. This helps us minimise the number of people we need while targeting a double output per worker as compared to the factories here,” he adds. Again, Lim has set out a timeline of three years to see whether the group’s robotics experiment will uplift overall efficiency.

Secondly, on the local front, the minimum wage hike can pose another concern. The new minimum wage rate of RM1,050 and this will be implemented nationwide, effective Jan 1, 2019.

While this may increase operational costs, Lim once again looked to automation. “For example, in the past, if I am doing 10 tonnes per worker, I can now try to target 15 tonnes per worker,” says Lim.

Then, there is Industry 4.0. “The good thing today is that technology has improved and the cost is more reasonable. For example, 10 years ago, when I wanted to use robotics, the cost was high,” he adds. “So, because of these technological improvements, pricing has become more reasonable.”

 

A practical touch

What’s next for Scientex? Lim says if anything, the last 12 months have shown that successful acquisitions drive up profitability. “These will drive better profits and better share prices,” he says. “Also certain property launches that we did, we had good response. These, I believe, will enhance share prices.”

But ultimately what provides the company with an advantage, Lim says, is its corporate philosophy of “management like water”. This is about adapting to the times and seasons while being willing to embrace change.

He also points to the “good system and clear structure” within Scientex that allows him to go about managing the company. “A professional team has been built to manage the group’s business and operations,” he says. “They also delegate authority to people with clear business directions to achieve pre-determined targets set by the management.”

It seems that Lim has this down pat but only time will tell whether Scientex will be able to smash its RM10 bil mark as well as its 50,000 affordable homes target. For now, the company can rest assured that it is in the steady hands of the man who took the company to become the RM4 bil behemoth it is today. FocusM

“We found a lot of people were wanting or needing to buy a house. The problem was, they cannot afford to buy a house. So if you can make the price affordable, there will be a lot of buyers.” – Lim



This article first appeared in Focus Malaysia Issue 302.