Period  1Q14

Actual vs. Expectations SCIENTX reported 1Q14 net profit of RM29.3m which came in at 19% of both the consensus' full year estimates of RM156.0m and ours of RM155.0m, respectively.

 We deem the earnings to be broadly in-line with expectations. The property division has met our estimates while the packaging segment came slightly behind our expectation given higher raw material costs, which compressed margins. However, the higher costs can be passed through to customers over the coming months and additional manufacturing capacities are also expected to come on-stream over the next two quarters which would lend a boost to SCIENTX's earnings.

Dividends  No dividends were declared for the quarter, as expected.

Key highlights  YoY, 1Q14 Group revenue rose by 51.0% to RM364.8m, amid a 67.5% jump in revenue in the manufacturing segment (RM172.6m) and a 9.7% increase in revenue from the property segment (RM75.6m). The sharp increase in manufacturing revenue was due to the acquisition of Great Wall in January 2013 (2Q13), in addition to an increase in export sales of stretch film. Meanwhile, revenue from the property segment also improved on higher take ups of highend development in Ayer Keroh, continued strong demand for affordable housing in Pasir Gudang and new contribution from industrial properties in Senai.

 Nevertheless, the increased contribution from the lower margin manufacturing segment (operating margin of 6.1% compared to 29.3% for the property segment), coupled with the timing issue in passing down the higher raw material prices caused overall NP to grow by a slower pace of 18.0% YoY.

 On a QoQ basis, 1Q14 NP slid by 3.1%, in on the backdrop of a 1.7% decline in revenue. Both the manufacturing and Property operating profit fell by 14.1% and 29.5% due to 1.3ppt and 4.2ppt margin compressions, respectively. The property segment is seeing a change in the product mix while the manufacturing side has yet to pass on its higher raw material costs. Coupled with higher borrowing costs, net margins contracted slightly to 8.0% (-0.2ppt).

Outlook  We remain positive on Scientex’s ongoing expansion plans and earnings potential within the manufacturing segment, which could accelerate the prospects of spinning off the Group’s property division.

Change to Forecasts   No changes to our FY14-15E earnings forecasts of RM155.0m-RM182.8m.

Rating We maintain our OUTPERFORM call

Valuation  Maintain TP of RM6.28, based on blended SOP valuation.

Risks to Our Call  Sharp increases to crude oil/resin prices which could disrupt the raw material pass-through mechanism.

 Property sector risks, including negative policies.

Source: Kenanga