Period  1Q15

Actual vs. Expectations SCIENTX’s recorded 1Q15 net profit of RM30.3m was weaker than expected, making up only 17.9% and 16.8% of our (RM169.7) and consensus (RM180.3) full-year forecasts, respectively. The variance from our forecast was due to lower-than-expected profits for the manufacturing segment (consumer packaging PE film) as SCIENTX lowered its average selling prices (ASPs) in order to increase its presence in new markets across Southeast Asia.

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

Key highlights 1Q15 net profit plunged by 38% QoQ to RM30.3m mainly due to (i) the adoption of a market penetration strategy for the consumer packaging PE film (to increase SCIENTX’s presence in new markets across Southeast Asia) which has caused EBIT margin compression in the manufacturing segment (5% in 1Q15 vs. 6% in 4Q14) and; (ii) foreign exchange loss of c.RM5.0m from USD borrowings.

 1Q15 Group revenue rose by 18.0% YoY to RM431.1m, on the back of an 11% jump in manufacturing segment revenues and 46% increase in property segment revenues. The former was mainly driven by additional blown films capacity while the latter was led by the contribution from its latest development in Taman Scientex Senai. Despite such items, above mentioned market penetration strategy; resulted in overall net profit growing at a slower pace of 3%.

Outlook  Guidance is for weaker forward earnings from the manufacturing segment as SCIENTX continues its market penetration strategy in 2Q15 to increase their presence in new Southeast Asia markets.

 SCIENTX would continue to face forex losses in view of the weakening of MYR against the greenback as 77% of its borrowings are denominated in USD as at 1Q15.

 We are neutral on its property segment; which we expect c.RM550m-RM600m worth of launches; given our property analyst’s weak outlook on Johor properties.

Change to Forecasts We are trimming our FY15E-FY16E forecasts by 22.7% and 18.0% to RM131.1m and RM147.2 after cutting (i) average resin prices forecasts (FY15: from MYR4,868/MT to MYR4,493/MT; FY16: from MYR4,870/MT to MYR4,536/MT); (ii) ASP assumptions for the consumer packaging segment due to the market penetration strategy and; (iii) assumed GDV launch in FY16 for property segment to RM550m (from RM650m).

Rating Downgrade to UNDERPERFORM from OUTPERFORM

Valuation  We trim our ascribed FY15 PER for manufacturing segment to 11.0x from 13.0x due to weaker outlook ahead for the small-cap stocks. The market penetration strategy may continue to compress its consumer packaging margin, while a prolonged drop in resin prices, (due to plunging in oil prices) would negatively impact SCIENTX’s revenue and earnings as it has little pricing power and its stretch film segment prices are highly correlated to resin prices.

 Meanwhile, for property segment, we increase our discount to FD RNAV to 50% from 35% previously, due to the neutral-to-negative outlook for property market in Johor. The ascribed discount to FD RNAV is lower than its close peer CRESENDO of 53% due to its property sales is higher compared to later.

 As a result of the lower earnings forecast and adjustment of the ascribed discount to FD RNAV, our new SoP-based target price is now at RM5.49/share (from RM7.63/share).

 We have downgraded the stock from OUTPERFORM to UNDERPERFORM due to overall weakness in both the property and plastic manufacturing outlooks.

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