Period  4Q14/FY14

Actual vs. Expectations  SCIENTX recorded 4Q14 net profit of RM48.8m, bringing FY14 net profit to RM148.5m which was 8.1% and 4.8% above our forecast and consensus, respectively. The variance from our forecast was due to better-than-expected profit margins for the manufacturing segment.

Dividends  A single tier final dividend of 13.0 sen was declared in 4Q14, bringing the total for FY14 to 21.0 sen, which was within our dividend forecast of 20.9 sen.

Key highlights 4Q14 net profit grew 34% QoQ to RM48.8m mainly due to better product mix in manufacturing segment (with the shift to more consumer packaging) and lower effective tax rate (11% in 4Q14 vs. 23% in 3Q14) due to a tax rebate entitlement for the ongoing capacity expansion.

 On a YoY comparison, 4Q14 net profit surged by 61% mainly due to the lower effective tax rate (11% in 4Q14 vs. 22% in 4Q13) and better margin in manufacturing segment (6% in 4Q14 vs. 4% in 4Q13) again due to the better product mix as mentioned above.

 FY14 net profit grew by 35% due to: (i) better performance achieved from industrial packaging and the full year contribution from consumer packaging products (vs 6 months contribution in FY13) in the manufacturing segment and (ii) overwhelming response to the Taman Scientex Senai project in the property segment.

Outlook  In conjunction with the FY14 result announcement yesterday, SCIENTX held a signing ceremony between Scientex Great Wall Sdn Bhd (SGW) and Futamura Chemical Co., Ltd. The agreement entails SGW investing RM300m CAPEX over the next 3 years (2014-2016) to increase its capacity to 120,000MT p.a. (from 30,000MT p.a.). This will spur SCIENTX’s consumer packaging segment.

 SCIENTX also acquired its first nano-layer technology line recently which is able to produce up to 22-layer films and reduces the stretch films thickness to 6 micron. This could be another margin driver for the stretch film segment.

 The above developments will enhance the manufacturing segment, which could accelerate the prospects of spinning off the Group’s property division.

Change to Forecasts We are adjusting our FY15E earnings forecasts to RM169.7m (+4.9%) after increasing the capacity (from 32,000MT p.a. to 52,000MT p.a.) and utilisation rate (from 67.5% to 70.0%) of the consumer packaging segment.

 Meanwhile, we introduce FY16E earnings forecasts of RM179.6m on which we assume earnings growth of 4.8% and 3.9% in manufacturing segment (increase in average utilisation rate of 65.0% in FY16 vs 63.3% in FY15) and property segment (launching more affordable house), respectively. We highlight that our net profit forecasts for FY16E do not include the additional BOPP film’s new production capacity from the Futamura deal pending a clearer timeline of the expansion plan.

Rating Maintain OUTPERFORM

Valuation  We raise our ascribed PER for manufacturing segment to 13.0x (from 10.2x) a premium to TGUAN due to its larger stretch film’s capacity but at a 23% discount to DAIBOCI PER of 16.0x due to lower manufacturing margins. (SCIENTX’s manufacturing segment EBIT margin of 5.8% vs. DAIBOCI’s EBIT margin of 16.8%)

 As a result of the higher manufacturing earnings forecast and adjustment of the ascribed PER and FD RNAV (due to revised remaining GDV value), our new SoP-based target price is now at RM7.63/share from RM6.34/share.

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

 Property sector risks, including negative policies.

Source: Kenanga