• Downgrade to NEUTRAL from Buy, with new MYR3.85 TP from MYR3.80, 5% upside. Scientex reported FY23 (Jul) results that were broadly in line with expectations. It posted double-digit YoY earnings growth driven by robust demand for its affordable housing offerings, offset by the decline in packaging sales. As its share price has rallied by 15% in the past three months, we think the stock is now fairly valued, trading at 10.6x, in line with its historical mean.

• Results review. 4QFY23 net profit rose 17% YoY (+27% QoQ) to MYR138.9m, bringing FY23 core earnings to MYR462.0m (+14.9% YoY). This is broadly in line with expectations at 102% and 100% of our and Street full-year estimates. Contribution from the packaging segment continued to slide sequentially amidst softer global demand and higher energy costs, but this was offset by the improving property segment. Consequently, FY23 EBIT margin improved to 14.5% (FY22: 14.1%). Scientex also declared a DPS of 5 sen (4QFY22: 5 sen).

• Packaging segment continued to slip. 4QFY23 packaging revenue declined 3% QoQ (-16.3% YoY) while operating profit fell 45.4% QoQ (-61% YoY) due to the higher electricity tariff on top of the impairment loss of its Myanmar operations of MYR22.7m – this led to a lower EBIT margin of just 3.9% (3QFY23: 7.0%, 4QFY22: 8.5%). Stripping off the impairment loss, however, would result in a higher EBIT margin of 7.6%. While we think global demand for packaging products is set to remain soft in the near term, we are optimistic that Scientex would record stronger FY24F numbers for the packaging segment. Furthermore, the company continues to innovate with new sustainably produced products which we think will likely drive future topline growth.

• Solid demand in the property segment. 4QFY23 revenue increased 24.9% QoQ (+21.9% YoY) amid higher progress billings from ongoing projects and robust demand from new launches. This was also aided by speedier authority approvals and processes, which had delayed revenue recognition in the past. As a result, Scientex managed to launch MYR2.1bn worth of properties in FY23, above its MYR2bn target. Demand for affordable homes remain healthy – as reflected in the 80% take-up rate for its new launches during the year. Hence, we continue to expect the property segment to be the main earnings driver in FY24F.

• D/G to NEUTRAL with new MYR3.85 TP. We fine tune our RNAV valuation to incorporate the company’s latest property-related figures and we make minimal adjustments to our earnings forecast as results were in line. Scientex’s valuation is now fair, with the stock trading at its historical P/E mean. We also incorporate a 0% ESG premium/discount to our TP given its ESG score of 3.0. Key risks to our call include operating costs fluctuations, as well as changes in demand of packaging products and property sales.

Source: RHB Securities Research - 21 Sept 2023