This article first appeared in The Edge Financial Daily on December 19, 2019

Scientex Bhd
(Dec 18, RM9.55)
Maintain market perform with an unchanged target price (TP) of RM9.45: Scientex Bhd’s first quarter ended Oct 31, 2019 (1QFY20) core net profit (CNP) of RM81.6 million came in within our and consensus expectations, making up 21% each of full-year estimates. No dividends were declared, as expected. Year-on-year, top line jumped 23%, lifted by higher contributions from two segments, namely the plastic manufacturing segment (+14%, driven by higher sales) and the property segment (+61%, driven by ongoing projects as well as new launches such as Taman Pulai Mutiara in Pulai, Taman Scientex Utama in Senai, Taman Scientex in Rawang and Scientex Durian Tunggal in Melaka). Group earnings before interest and taxes (Ebit) margins improved to 13.5% (+2.9 percentage points [ppts]) on a better product mix for the manufacturing segment (+2.2ppts) while the property segment’s margin remained flattish (-0.7ppt). Overall CNP increased by 55%.

Quarter-on-quarter, top line was down by 7% mainly due to the timing of recognitions of unbilled property sales resulting in lower segment revenue (-27%) which was mitigated by improved sales from the manufacturing segment (+4%). All in, CNP was down by 34% on weaker Ebit margins at 13.5% (-5.6ppts) arising from the variability in its product mix, higher financing cost (+17%) and a higher effective tax rate (which normalised to 24.5% versus 21.5%).

Scientex Bhd’s manufacturing business will be focusing on ramping up the plant utilisation rate to a target of about 75% over the next few years (versus about 70% currently), coming mostly from its BOPP (biaxially oriented polypropylene) plant and Arizona plant in the US. This, coupled with planned property launches of RM1.1 billion-RM1.3 billion in FY20-FY21, is expected to drive overall growth going forward.

Meanwhile, the group has acquired an 85.7 acre (34.68ha) leasehold agricultural land in Kota Tinggi, Johor for RM39 million (translating into RM10.5 per square foot [psf]), which we deem to be decent compared with the price range of recent land transactions in Johor of between RM19 and RM35 psf, although the total land cost could subsequently increase on account of conversion premiums and rezoning. Due to the small size of the acquisition cost, it will be internally funded (using its current RM241 million cash pile) with fairly insignificant earnings impact (about RM6.5 million CNP per annum or less than 1% of FY21 CNP) which is expected to only kick in from FY22 onwards.

Its unbilled property sales of RM700 million will provide less than one year of earnings visibility. Our FY20-FY21 dividend per share estimates of 21.6-26.6 sen which are based on the group’s payout ratio of 30% imply yields of 2.3-2.8%.

We maintain “market perform” and our TP of RM9.45 based on FY20 estimated (FY20E) valuations. Our TP is derived from our FY20E sum-of-parts valuation with: i) an unchanged price-earnings ratio (PER) of 10 times for the property segment, which is on a par with Johor-exposed peers’ PER given Scientex’s exposure to the challenging Johor property market; and ii) a 16 times PER for the manufacturing segment, which is at a 9% discount compared to SLP Resources Bhd’s applied PER of 18% given its lower margin of 7% versus SLP’s 15%, but above Thong Guan Industries Bhd (11 times PER) given its strong earnings growth.

We believe the stock has already priced in its earnings outlook. Risks to our call include: i) higher/lower-than-expected resin cost; ii) stronger/weaker product demand from overseas; iii) stronger/weaker-than-expected property sales; and iv) foreign currency risk from a weakening ringgit. — Kenanga Research, Dec 18