Scientex Bhd 
(June 30, RM6.89)
Maintain underperform with a higher target price (TP) of RM6.09: Net profit of RM109.3 million for the nine-month period of the financial year ending July 31, 2015 (9MFY15) came in slightly below consensus forecast (RM158.8 million) at 69%, but came in above ours (RM131.1 million) at 83% of our forecast. We think Scientex Bhd missed market expectations due to lower-than-expected margin expansion of its new Polyethylene film (PE film) capacity. However, Scientex exceeded our forecast due to higher-than-expected property sales for the quarter.  

Property sales of RM383.1 million came in on track, making up about 82% of our FY15 estimated (E) sales of RM465.5 million. As expected, an interim dividend per share (DPS) of nine sen was declared. This made up 47% of our FY15E DPS forecast of 19.3 sen. 

Year-on-year (y-o-y), 9MFY15 net profit rose 10%, mainly driven by a 35% higher property revenue. Earnings from manufacturing slightly improved by 4% as PE film capacity increased by 1,000 tonnes to 5,000 tonnes. 

Net profit for the third quarter of FY15 (3QFY15) improved 19% quarter-on-quarter and 18% y-o-y, driven by the manufacturing segment. The division’s earnings before interest and tax (Ebit) increased 14%, thanks to higher Ebit margin (plus 1% to 6%) from its new consumer packaging product line. Forex losses were also sharply lower (minus 68% to RM3.1 million) as US dollar-denominated loans were reduced 36% to RM134 million.

The expansion of its cast polypropylene (CPP) (total of 12,000 tonne per annum) and biaxially oriented polypropylene (BOPP) (total of 60,000 tonne per annum) film capacities for its consumer packaging division is on track and expected to be completed by end-2015 and mid-2016, respectively. However, we have only imputed minimal contribution from the expansion, pending further clarity of potential uptake, considering the massive scale of expansion (nine times higher capacity for BOPP films and a new plant for CPP films).

Moving forward, Scientex should be less impacted by the weaker ringgit as the company reduced their US dollar borrowings exposure to 47% as of 3QFY15, versus 58% in 2QFY15. The overall property market is expected to be challenging in 2015, especially in Johor. Going forward, we think property segment sales trend could slacken due to tighter lending policies and poor market sentiment. However, Scientex is targeting to launch more affordable houses (around 90% of total launches) in the next two years, which should provide some earnings resiliency.

We revise higher FY15 to FY16 net profit forecasts by 6%-5% to RM139.1 million-RM155.2 million as we impute higher manufacturing Ebit margin from 4.7% to 5% and incorporate higher debt assumption from the proposed land acquisition. 

We maintain our “underperform” rating. The manufacturing earnings growth from capacity expansion will only kick in from FY17, while for the property segment, which made up 77% of 9MFY15 earnings, the outlook remains unexciting in the near term. The sum-of–parts-based TP has been revised higher to RM6.09 from RM5.79 as we increase our manufacturing segment price-earnings ratio (PER) target to 12 times from 11 times. The higher PER target of 12 times is based on a 20% discount to small- to mid-cap technology-sector average PER of 15.5 times. — Kenanga Research, June 30

This article first appeared in The Edge Financial Daily, on July 1, 2015.