KUALA LUMPUR (March 10): Affin Hwang Capital has downgraded its rating for Scientex Bhd to "hold" from "buy", as it expects further margin squeeze in the group’s manufacturing segment in the subsequent quarters.

Its analyst Azhani Hashim said in a note today the flexible plastic packaging manufacturer’s core net profit of RM189 million for the six months ended Jan 31, 2021 (1HFY21) made up 42% of street’s and his full-year FY21 forecasts.

“While the property segment recorded higher sales and progress billings, the manufacturing segment saw a 1.6 percentage point decline in earnings before interest and taxes margin from higher resin and freight cost,” he said.

Moving forward, Azhani expects some squeeze in the manufacturing segment’s margin due to rising resin prices as well as higher freight costs.

Citing data from Bloomberg, he said high-density polyethylene, low-density polyethylene and polypropylene resin prices rose by more than 50% year on year and more than 10% year to date attributable to global tight inventories that have resulted from both planned and unplanned shutdowns and strong demand.

Freight cost has also increased due to global shortage of shipping containers, he added.

He adjusted Scientex’s core earnings per share lower by 63% to 70% in FY21 to FY23 after incorporating wider share base from the issuance of 2:1 bonus issue; higher resin and freight costs; some improvement in property earnings, underpinned by current unbilled sales of RM900 million; and lower interest rate.

In view of the earnings and valuation risk stemming from increasing raw material prices, higher freight cost and a softer recovery in plastic demand, he lowered his valuation multiple for the plastic segment to 12 times (based on a five-year average forward mean) from 15 times previously.

“Based on a sum-of-the-parts valuation of 12 times FY21 price-to-earnings ratio for manufacturing; 30% discount to property revalued net asset value, we derived our 12-month price target of RM4.05. With the limited upside to target price, we downgrade Scientex to 'hold',” Azhani added.

At 11.10am, Scientex shares were up one sen or 0.25% at RM4.01, bringing a market capitalisation of RM6.23 billion. A total of 597,500 shares were done.