Scientex reported a good set of results: 6MFY20 core net profit jumped 38% yoy to RM183m on better performances from both its property and manufacturing segments. Sequentially, 2QFY20 core net profit grew by 21% qoq to RM100m driven by margin expansion, buoyed by favourable sales mix and benefitting from cheaper resin costs, we believe. Overall, the results were in line with street and our expectations. Nonetheless, we trim our FY20-22E EPS forecasts by 4- 7%, taking into account the potential impact of Covid-19, and lower our TP to RM10.10 (from RM10.50). We are keeping our BUY call given its solid execution, earnings track record and growth.

6MFY20 Core Net Profit Within Expectations

Scientex’s 6MFY20 core net earnings grew by 38% yoy to RM183m, driven by higher contributions from the manufacturing and property divisions. Property’s EBIT grew by 32% yoy to RM139m, contributed by steady progress billings from existing projects in Kulai, Melaka, Selangor and Perak, as well as a maiden contribution from Taman Pulai Mutiara 2, Johor. Manufacturing’s EBIT also ballooned by 61% yoy to RM121m, driven by higher sales volume from the export (+10% yoy) and domestic markets (+34% yoy, thanks to the contribution from Daibochi’s converting business). Overall, the results were within street and our expectations – 6MFY20 core net profit accounted for 47-48% of the street’s and our fullyear profit forecasts.

Sequentially, Earnings Grew by 21% on Higher Revenue and Margins

Elsewhere, Scientex’s 2QFY20 core earnings rose by 21% qoq to RM100m on higher revenue (+4% qoq, mainly from higher property sales) and a 1.8ppts increase in its 2QFY20 EBITDA margin to 18.6% (both segments experienced higher margins, see Fig 2).

Plastic Manufacturing May Wrinkle From Covid-19 Outbreak

For the plastic manufacturing division, Scientex shared during the results briefing conference call that the shipments for Scientex’s flexible plastic packaging may face some delays in the near term, especially from Korea and Japan – both markets contributed an average 23.5% of manufacturing revenue between FY15-19. On a brighter note, we learnt that Scientex, as a leading global plastics player, has received numerous enquiries from MNCs looking for alternative suppliers for flexible plastic packaging, due to temporary supply-chain disruptions in China amid the Covid-19 outbreak.

Political Uncertainty May Hamper Appetite for Scientex’s Property

As for the property division, Scientex continues to see healthy c.80% takeup rates for its affordable homes across Peninsular Malaysia. Although management remains positive on its property division, we think the uncertainty in the political arena could potentially see a: i) delay in regulatory approvals and ii) deter Malaysians from spending on big-ticket items. Nonetheless, we expect the FY20E property numbers will be well supported by the current unbilled sales of RM750m and target GDV of RM1.1bn (est: 4.4k units across 20 launches).

Maintain BUY With Lower TP of RM10.10 (from RM10.50)

In spite of the strong 6MFY20 earnings, we have trimmed our FY20-22E EPS forecasts by 4-7% after incorporating lower sales volume for both manufacturing and property due to the disruption from the Covid-19 outbreak. In tandem, we lowered our 12-month price target to RM10.10 (from RM10.50) based on a SOTP valuation. We lowered our PE multiple for the plastic manufacturing segment to 15x (+1SD of 3-year forward PER; from 17x) and a 40% discount to its estimated RNAV/share for the property segment respectively. At a 13x FY20E PER, Scientex’s valuation looks appealing, considering its solid earnings delivery and execution. Maintain BUY. Key downside risks: (i) higher-than-expected resin costs, (ii) weaker export sales and (iii) weaker-than-expected property sales.

Source: Affin Hwang Research - 12 Mar 2020