• 1H FY21 core net profit of RM189m made up 42% of street’s and our full-year forecasts
• While the property segment recorded higher sales and progress billings, manufacturing saw a 1.6ppt decline in EBIT margin from higher resin and freight cost. We expect further a margin squeeze in subsequent quarters
• We Downgrade Scientex to HOLD From Buy With a New TP of RM4.05

2Q FY21 Manufacturing Margins Hit by Higher Cost

Scientex’s 2Q FY21 core net profit grew by 17% qoq to RM101.9m mainly due to higher revenue contribution from the property (+31.8% qoq) and manufacturing (+6.0% qoq) segments. The property segment saw steady construction progress, positive contribution from its maiden project in Taman Scientex Kota Tinggi and seven new launches during the quarter. Meanwhile, the manufacturing segment saw higher sales volume from some recovery in demand. Elsewhere, the EBITDA margin remained relatively flat at 18.3%. However, manufacturing EBIT margins fell by 1.6ppt qoq due to the recent rise in resin prices and freight cost.

1H FY21 Core Net Profit Grew by 3.5% Yoy

Scientex’s 1H FY21 core net profit grew by 3.5% yoy to RM189m, despite the revenue declining by 4.6% yoy due to lower contribution from the manufacturing segment (-8.6% yoy), cushioned by a 6.2% yoy increase in property earnings. The manufacturing segment saw lower sales volume due to the pandemic, while the property segment’s sales picked up during the quarter as it saw RM775m worth of property projects launched with an average take-up rate of 75%. Meanwhile, EBITDA margin improved 0.7ppt yoy due to better sales mix and product margins as Scientex enjoyed lower raw material cost in the early part of the financial year. Elsewhere, interest expense was lower due to lower interest rate while tax expense was also lower.

Expecting Margin Squeeze in the Coming Quarters

Moving forward, we expect some squeeze in the manufacturing segment’s margin due to rising resin prices as well as higher freight costs. Data from Bloomberg showed that HDPE, LDPE and PP resin prices rose by more than 50% yoy and more than 10% YTD (through 5 March 2021) attributable to tight global inventories that have resulted from both planned and unplanned shutdowns and strong demand. Further, the freight cost has also increased due to a global shortage of shipping containers.

Downgrade to HOLD With a Target Price of RM4.05

We are adjusting down our core earnings by 5-16% in FY21-23E after incorporating (i) higher resin and freight costs; (ii) some improvement in property earnings, underpinned by current unbilled sales of RM900m; and (iii) lower interest rate. Additionally, in view of the earnings and valuation risk stemming from increasing raw material prices, higher freight cost and a softer recovery in plastic demand, we are lowering our valuation multiple for the plastics segment to 12x (based on a past-5-year average forward mean) from 15x previously. Based on our SOTP valuation of 12x FY21E PER for manufacturing, a 30% discount to property RNAV, we derive our new 12-month target price of RM4.05 (previously RM4.40, adjusted for 2:1 bonus issue). With the limited upside to our target price, we downgrade Scientex to HOLD, from BUY. Key upside/downside risks to our HOLD call: (i) lower/higher resin costs, (ii) stronger/weaker export sales and (iii) stronger/ weaker-than-expected property sales.

Source: Affin Hwang Research - 10 Mar 2021