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This article first appeared in The Edge Financial Daily on June 22, 2018

Scientex Bhd
(June 21, RM6.87)
Upgrade to market perform with a lower target price (TP) of RM6.90 from RM7.35:
Scientex Bhd’s core profit of RM201.3 million for its nine months ended April 30, 2019 (9MFY18) came in below our and the consensus estimates at 69% and 68% respectively.

 

Its top line came in below, at 65%, which we believe was due to weaker-than-expected recognitions for the property segment from latest projects such as Taman Scientex Durian Tunggal, Melaka, and Scientex Meru, which are in the early stages of construction.

Additionally, the segment was also impacted by longer-than-expected time frames in attaining regulatory approval and permits for some of the projects due to uncertainty during the election period.

A single-tier interim dividend of 10 sen was announced, which was also below (58%) of our financial year ending July 31, 2018 forecast (FY18F) dividend of 17.2 sen.

Quarter-on-quarter, the top line declined by 5%, mainly due to a lower revenue recognised from the property segment (-17%), as recent launches were still in the early stages of progress billings, while the manufacturing segment declined marginally (-1%).

As a result of lower contributions from the property segment, the group’s profit before tax margin also declined marginally by 0.7 percentage point.

All in, core net profit (CNP) declined by 10% to RM61.1 million. Year-on-year (y-o-y), year-to-date (YTD) CNP has increased by 10%, mainly driven by top-line growth (+8%) on better contributions from the manufacturing segment (+12%). This was on the back of a flattish margin of 10.6% (versus 10.4%).

Scientex is focused on ramping up its plant utilisation, targeting 70% over the next few years (compared with about 60% currently), mostly for its biaxially oriented polypropylene plant and Arizona plant in the US, which will mostly contribute from FY19.

FY18 CNP growth will be driven by an increased manufacturing capacity (+44% y-o-y) to 455,000 tonnes per annum.

While we do not expect additional capacity in FY19, growth is premised on increased utilisation rates of the manufacturing segment in FY18 to FY19 of 62% to 65%, and full-year contributions from Klang Hock Plastic Industries Sdn Bhd in FY19.

We expect lower FY18 to FY19 CNP by 13% to 8% to RM256 million to RM293 million on lower revenue recognitions in FY18, while we have also back-loaded some of FY19 launches on marginally lower recognitions.

All in, we expect launches of RM700 million to RM800 million in FY18 to FY19 (versus RM900 million to RM1.1 billion).

We upgrade to “market perform” from “underperform”, with a lower TP of RM6.90 post lowering our earnings for FY19 valuations.

Our TP is based on our sum-of-parts FY19 valuations, with an unchanged 6.8 times price-earnings ratio (PER) for the property segment, which is at a 10% discount to small- to mid-cap property players due to Scientex’ exposure to the challenging Johor market, and 15.8 times applied PER for the manufacturing segment.

We are comfortable with the rating as its share price has seen a steep decline YTD (-23%), while we believe that we have accounted for foreseeable earnings risks going forward.

Risks to our call include higher/lower-than-expected resin cost, weaker or stronger product demand from overseas, weaker/stronger-than-expected property sales, foreign currency risk from a strengthening ringgit, and new entrants/competition biting into its market share. — Kenanga Research, June 21

 

 

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