This article first appeared in The Edge Financial Daily on March 13, 2020

Scientex Bhd 
(March 12, RM8.77)
Maintain market perform with a lower target price (TP) of RM8.90: Scientex Bhd’s first half of financial year 2020 ending July 31 (1HFY20) core net profit (CNP) of RM181.4 million came in well within our and consensus estimates at 47% and 46% respectively. No dividends announced, as expected.

Year-on-year to year to date, top line jumped by 21% on contributions from both its segments with the plastic manufacturing segment (+17%) driven by higher sales, while the property segment revenue (+34%) was up on ongoing recognitions for projects in Johor, Melaka, Selangor and Perak. Earnings before interest and tax (Ebit) margin improved (+2.4 percentage points [ppt]) for the manufacturing segment on increased production efficiency and better product mix. All in, its CNP was up by 44%.

Quarter-on-quarter, top line was up by 4%, mainly driven by the stronger property segment (+15%) on higher recognitions while the manufacturing segment was rather flattish (+1%). However, due to Ebit margin improvement (+1.9ppts) from reasons mentioned above, CNP was up by 22%.

Scientex’s manufacturing segment is focused on ramping up utilisation, targeting about 75% over the next few years (versus about 70% currently), mostly from its biaxially oriented polypropylene plant and Arizona plant in the US. Growth is premised on gradual improvement in utilisation rate for the manufacturing segment, and on launches worth around RM1.1-1.3 billion in FY20-FY21 for the property segment.

We lower FY20 estimated (FY20E) CNP marginally by 2.5% for now to RM376 million on lower manufacturing sales to be conservative in light of the challenging market environment arising from the Covid-19 situation, while FY21E CNP remains unchanged at RM474 million. Unbilled sales of RM750 million provides less than one year of visibility. FY20-FY21 dividends of 21.1-26.6 sen are based on its payout ratio of 30% implying yields of 2.4-3.0%.

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

We will continue to monitor the situation closely and may look to up our valuations for the manufacturing segment once concerns of Covid-19 and the challenging market conditions abate.

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 weakening ringgit. — Kenanga Research, March 12