Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit (NP) of RM109.3m came in slightly below consensus forecast (RM158.8m) at 69% but came in above ours (RM131.1m) at 83% of our forecast. We think SCIENTX missed market expectations due to lower-than-expected margin expansion on its new PE Film capacity. However, SCIENTX exceeded our forecast due to higher-than-expected property sales during the quarter.

Property sales of RM383.1m came in on track, making up about 82% of our FY15E sales of RM465.5m.

Dividends

As expected, an interim DPS of 9.0 sen declared. This made up 47% of our FY15E DPS forecast of 19.3 sen. Key highlights

YoY, 9M15 NP rose 10% mainly driven by 35% higher property revenue. Earnings on manufacturing slightly improved by 4% as PE Film capacity increased by 1.0k MT to 5.0k MT.

3Q15 NP improved 19% QoQ and 18% YoY driven by manufacturing segment. The division’s EBIT increased 14% thanks to higher EBIT margin (+1% to 6%) from its new Consumer Packaging product line. Forex losses were also sharply lower (- 68% to RM3.1m) as USD-denominated loans were reduced 36% to RM134m.

Separately, SCIENTX proposed to acquire 326.1 acres of freehold land in Pulai, Johor for a total purchase consideration of RM219.0m or RM15.4psf. The proposed acquisition would increase total landbank to 1.2k acres or +38% (refer overleaf).

Outlook

The expansion of its CPP (total 12k MT p.a.) and BOPP films (total 60k MT p.a.) capacities for its consumer packaging division is on track and expected to be completed by end-2015 and mid-2016, respectively. However, we have only imputed minimal contribution from the expansion pending further clarity on potential uptake considering the massive scale of expansion (9x higher capacity for BOPP, new plant for CPP).

Moving forward, SCIENTX should be less impacted by weaker MYR as the company reduced their USD borrowings exposure to 47% as of 3Q15 (vs. 58% in 2Q15).

The overall property market is expected to be challenging in 2015, especially in Johor. Going forward, we think property segment sales trend could slacken due to tighter lending policies and poor market sentiment. However, SCIENTX is targeting to launch more affordable houses (c.90% of total launches) in the next two years which should provide some earnings resiliency.

Change to Forecasts

Revised higher FY15-16E NP forecast by 6%-5% to RM139.1m- RM155.2m as we impute higher manufacturing EBIT margin (from 4.7% to 5.0%) and incorporate higher debt assumption from the proposed land acquisition.

Rating

Maintain UNDERPERFORM

Valuation

Manufacturing earnings growth from capacity expansion will only kick in from FY17 onwards, while for the property segment, which made up 77% of 9M15 earnings, outlook remains unexciting in the near-term.

SoP-based TP revised higher to RM6.09 (from RM5.79) as we increase our manufacturing segment target PER to 12.0x (from 11.0x). Higher target PER of 12.0x is based on a 20% discount to small-mid cap Technology sector average PER of 15.5x. We have selected the Technology sector as our new benchmark as we think the Plastics sector is similarly driven by the USD export play and should benefit from the weaker ringgit.

Risks to Our Call

Lower-than-expected crude oil prices,

Better-than-expected property sales forecast and/or margins.

Source: Kenanga Research - 30 Jun 2015