Period  2Q14/1H14

Actual vs. Expectations SCIENTX recorded 2Q14 net profit (NP) of RM33.9m (+15.6% QoQ, +32.5% YoY), bringing its 1H14 NP to RM63.3m (+25.3% YoY).

 This is slightly below expectations, at 40.8% of our full-year estimates and 41.7% of the consensus numbers, with the key culprits being: (i) higher raw material costs, which affected margins for the manufacturing segment and (ii) overly aggressive estimates for property launches.

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

Key highlights  QoQ, SCIENTX registered a topline growth of 5.1% while net profit increased by 15.6%. Revenue from the manufacturing segment was flat (-0.3% QoQ) with higher resin prices and the electricity tariff hike leading to a 9.9% QoQ decline in EBIT. Nevertheless, the property segment was more than able to offset the weaker performance from the manufacturing segment, with a 25.7% revenue growth and 32.1% increase in EBIT.

 YoY, SCIENTX's 2Q14 Group revenue rose by 41.5% with growth being driven by both the manufacturing segment (+49.1%) and the property segment (+22.5%). For the manufacturing segment, the increase in revenue was underpinned by higher demand for stretch film products in the Asia-Pacific region as well as full-quarter contributions from the consumer packaging products. At the same time, the Group's property division benefited from positive responses for new launches and higher progress billings from existing projects.

Given the larger contribution from the lower margin manufacturing segment, overall net profits increased by smaller proportion of 32.5% YoY.

 YTD, 1H14 revenue enjoyed a decent growth of 46.0% with increases from both the manufacturing (+57.8% YoY) and property segments (16.4% YoY). In addition to the higher stretch film sales mentioned above, the manufacturing segment also benefited from a full 6-month contribution from the newly acquired consumer packaging subsidiary compared to just 1-month contribution in 1H13 (Jan 2013). Meanwhile, revenue growth from the property segment was attributed to resilient demand in Iskandar Malaysia and Melaka as a result of its strategic location and affordable selling prices. In line with the better topline performance, 1H14 net profit rose by 25.3%.

Outlook  While the rise in raw material prices had affected margins for the manufacturing segment, we remain positive on Scientex's longerterm prospects. Ongoing expansion plans for higher margin consumer packaging films and product extensions such as the thinner gauge film (6 microns) should also provide added buffers against margin contractions.

 At the same time, the group has also recently completed the expansion of its stretch film capacity to 194k MT/ annum (Dec

2013), which would provide the impetus for growth in manufacturing revenue and accelerate the prospects of spinning off the Group's property division- a potential rerating catalyst for the stock.

Change to Forecasts We are trimming our FY14-15E earnings forecasts to RM145.5m (-6.1%) and RM170.4m (-6.8%), respectively, after reducing our gross margin assumptions for the manufacturing segment, and also by assuming less aggressive property launches.

Rating Maintain OUTPERFORM

Valuation  Despite the slightly lower earnings forecast, we are raising our SOP-based TP to RM6.69 (from RM6.28) after rolling over our manufacturing segment valuation base year to FY15.

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