3QFY18 core net profit fell 9.0% qoq and 16.5% yoy on a weaker-than-expected performance from the property division amid lower progress billings and longer-thanexpected property approval process prior to the general election. Nevertheless, we are expecting a stronger 4QFY18 core net profit on: a) maiden contribution from Klang Hock Plastic Industries (KHPI) starting May 18, and b) normalised property segment performance post general election. Upgrade to BUY with a new target price of RM8.20.

RESULTS

• Results below our and street’s expectations. Excluding RM5.3m of net forex gain arising from higher export sales and strengthening of the ringgit, 3QFY18 core net profit came in at RM55.9m (-9.0% qoq, -16.5% yoy), bringing 9MFY18 numbers to RM187m (+1.8% yoy). We deem the results to be below our and the street’s estimates as it only accounts for 60% and 63% of respective FY18 full-year core forecast numbers. The key discrepancies were primarily due to weaker-than-expected contribution from the property segment amid lower progress billings and longer-than-expected property approval process prior to the general election.
• Higher export sales lifted 3QFY18 manufacturing EBIT by 36.4% yoy. Manufacturing EBIT rose 36.4% yoy to RM34.3m primarily attributed to: a) increase in export sales of flexible packaging product, and b) higher margin amid better product mix. Consequently, manufacturing EBIT margin rose 1.9ppt yoy to 7.6%. Note that utilisation rate at the new BOPP plant has improved to about 50% in 3QFY18 and we believe that ASP has also improved as management embarked on an evolved strategy to focus on margins rather than volume. In 3QFY18, exports made up 77% of the manufacturing sales (3QFY17: 76%).
• Property segment hampered by early stages of construction progress. Understandably, property EBIT dropped 30.7% yoy to RM43.7m as: a) early stages of construction works at its latest projects in Taman Scientex Durian Tunggal, Melaka and Scientex Meru resulted in slower progress billings, and b) general election caused some delay in obtaining regulatory approvals and permits for some of the property projects. Scientex launched new properties worth RM789.2m in GDV in 9MFY18 and management intends to launch a total of RM600m worth in GDV of new projects in FY18.

STOCK IMPACT

• Penetrative pricing effect in the manufacturing segment should ease. Gross margin in the manufacturing segment dipped 2.8ppt yoy to 11.8% in FY17, primarily attributed to the penetrative pricing strategy adopted to gain market share amid capacity expansion, especially in the consumer packaging segment. That said, we believe margin compression should ease once the BOPP plant begins to contribute in the coming quarters. Our forecast incorporates a 1.2ppt improvement in FY18 gross margin.
• Growing consumer packaging segment. Scientex has increased its polyethylene (PE) capacity by more than three-fold in three years after completing: a) the installation of additional production lines at its plants in Rawang for RM21m at end-16; and b) capacity expansion of 24,000 MT p.a. (for RM50m) at its Ipoh plant (Scientex Great Wall Ipoh). Consequently, annual PE output has increased from 60,000MT to 84,000MT. Management intends to install a third BOPP line in the new plant in FY18- 19, which should raise capacity to about 100,000MT p.a..

EARNINGS REVISION/RISK

• We cut our FY18-20 net profit forecasts by 11%, 25% and 14% respectively after taking into account lower sales assumption for the manufacturing division as we expect some delay in the contribution of the new BOPP plant.

VALUATION/RECOMMENDATION

• Upgrade to BUY and with a lower SOTP-based target price of RM8.20 (previously RM9.20), based on 14x FY19F PE for the manufacturing segment and RNAV methodology on the property segment. Our target price implies 11.1x FY19F PE. We continue to believe Scientex’s long-term prospects are promising, attributed to greater economies of scale at its manufacturing segment post several acquisitions and a growing landbank to support the property segment.

Source: UOB Kay Hian Research - 21 Jun 2018