Period  3Q14/9M14

Actual vs. Expectations SCIENTX recorded its 3Q14 net profit of RM36.3m, bringing 9M14 net profit to RM99.6m which was slightly below expectations, making up 68% of both our full-year FY14 estimates as well as market consensus. The variance from our forecasts was due to higher cost environment which affected profit margins for the manufacturing and property segment.

Dividends  A single tier interim dividend of 8 sen was declared in 3Q14, compared to 7 sen announced in 3Q13.

Key highlights  SCIENTX’s 3Q14 net profit rose by 7.1% QoQ to RM36.3m on the back of an 11.3% hike in revenue. Revenue from the manufacturing segment and property segment was up by +10.0% QoQ and +15.3% QoQ, respectively. The higher cost environment has caused a decline in EBIT margin in both segments (group EBIT margin of 11.5% in 3Q14 vs 11.8% in 3Q13).

 On a YoY comparison, 3Q14 net profit grew 23.0% while revenue rose 23.7% which was driven by both the manufacturing segment (+15.2% YoY) and the property segment (+56.9% YoY). 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 higher contribution from the consumer packaging products. At the same time, the Group's property division benefited from overwhelming response for Taman Scientex Senai project and higher progress billings from on-going projects.

 YTD, 9M14 revenue grew by 37.0% with improvement from both the manufacturing (+39.5% YoY) and property segments (29.5%

YoY). The better sales performance achieved from industrial packaging and consumer packaging products was the key driver of the revenue growth in manufacturing segment. In addition to the overwhelming responses for Taman Scientex Senai project mentioned above, the property segment also benefited from encouraging response for the property launched in Johor and Melaka. In line with the better revenue performance, SCIENTX's 9M14 net profit rose by 24.5%.

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

 The company is currently exploring new export market in Asia Pacific and selected EU countries which may further increase the manufacturing segment’s sales going forward.

 At the same time, the expansion of its blown film lines for its consumer packaging division on track and expect to be completed by 2014, which would provide the impetus for growth in manufacturing revenue.

Change to Forecasts We are trimming our FY14-15E earnings forecasts to RM137.3m (-5.6%) and RM161.7m (-5.1%) after reducing our revenue by lowering the capacity utilisation rate and gross margin assumption (from 10.4% to 9.9% in FY14E; from 10.7% to 10.1% in FY15E) for the manufacturing segment as our previous plastics sales forecast was aggressive.

Rating Maintain OUTPERFORM

Valuation  As a result of the lower manufacturing earnings forecast, our new target price is now at RM6.34/share from RM6.69/share previously based on an unchanged 10% holding company discount to its 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