Investment Highlights

• We downgrade Scientex to HOLD from BUY with a lower fair value (FV) of RM4.00/share (previously RM5.25/share) based on sum-of-parts (SOP) valuation (Exhibit 1). We now peg Scientex’s manufacturing segment to a lower FY23F PE of 15x (previously 18x), a 25% premium to its peer stretch film makers to reflect its higher market capitalisation and regional leader status in packaging solutions. Our FV also imputes a 3% premium to the SOP based on our 4-star ESG rating (Exhibit 6).

• Our FY22F–FY24F earnings have been cut by 12%–13% due to lower property segment contribution as Scientex’s 1HFY22 results came in below expectations, accounting for 41% our earlier FY22F earnings and 40% of consensus. This is primarily due to higher raw materials prices and freight charges, affecting both the consumer packaging and property segments, which consequently dragged the group’s 1HFY22 total EBIT margin down by 2% points YoY to 14%.

• This also largely caused 2QFY22 EBIT margin to contract 1% point QoQ to 13%. However, this was slightly offset by the property development division albeit being challenged by new regulatory application processes, which affected the installation timeline of power supply infrastructure for its development in the southern region.

• The group expect the disruptions from the new application processes to begin easing in 2HFY22. Scientex is targeting RM1.7bil new FY22F launches (6,000 units across 24 launches) despite only RM410mil worth of launches in 1HFY22 (1,545 units across 7 launches) due to these regulatory impediments. Hence, we conservatively assume FY22F new launches at RM1.2bil. Presently, progress billings from unbilled sales stood at RM1bil (0.8x FY22F property development revenue), with an average take-up rate of 66%.

• We still like Scientex for: (1) the strong prospects of the packaging industry due to growing consumer spending, a shift to on-the-go food and beverages due to a hectic lifestyle and stricter food safety standards; (2) continuous R&D efforts to provide a wider range of packaging solutions; and (3) a robust property development business despite a generally soft market thanks to its focus on predominantly affordable landed residential units in secondary suburbs.

• However, we are of the view that its upside potential is capped against the backdrop of increasing competition and margin squeeze in its packaging business amid a stagflation outlook together with slower-than-expected property launches.

Source: AmInvest Research - 17 Mar 2022