Period

1Q16

Actual vs. Expectations

1Q16 Core Net Profit (CNP*) at RM64.3m exceeded consensus (RM185.3m) and our forecast (RM173.4m) at 35% and 37%, respectively. This was mainly due to higher-than-expected margins post acquisition of Mondi Group’s consumer packaging plants (renamed SGW Ipoh), and higher Property sales recognition on completion of its Skudai project (The Garden Residences).

Dividends

No dividend was declared, as expected.

Key highlights

YoY, 1Q15 CNP jumped 112% to RM64.3m driven by Manufacturing segment margins which doubled to 10%, which resulted in Manufacturing EBIT surging 158% to RM38.0m. We believe this was largely due to higher proportion of consumer packaging product mix as well as lower resin cost trends. Property EBIT also improved 48% to RM47.5m, driven by higher sales recognition upon completion of projects.

QoQ, 1Q15 CNP rose 61% mainly on higher Manufacturing EBIT (+54%) due to new contribution from recently acquired SGW Ipoh consumer packaging plants, which also improved margins (by 2%) to 10%. However, Property EBIT declined 23% due to lower margin product mix recognized.

Outlook

For Manufacturing, we gather that the new CPP expansion (12k metric tons (MT)/year) is in its testing phase, and earnings contribution should be felt in 2H16. Meanwhile, the new BOPP plant should begin contribution in early-FY17. We expect the new consumer packaging products to improve Manufacturing segment margins from 6% to 10%.

For Property, we expect the on-going sector slowdown to persist in 2016 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

We raise FY16-17E CNP by 30-23% to RM224.9m-243.9m after raising consumer packaging products margins and cutting resin costs to USD1,100/MT (from USD1,250/MT) in line with current pricing trends.

Rating

Upgrade to MARKET PERFORM (from UNDERPERFORM)

Valuation

We increase our TP to RM9.49 (from RM6.91) based on Sum-of- Parts as we upgrade our earnings and revise our valuation methodologies for both segments.

For Manufacturing side, we up our applied PER to 14.0x (from 13.0x) to reflect higher future contribution from consumer packaging products. Post-expansion, Consumer Packaging capacity is expected to make up 50% of total capacity, from 33% currently. Our new applied PER reflects a 10% discount to pure Consumer Packaging players’ applied PER of 15.5x.

As for Property, we switch our segment valuation basis to PER (from 50% RNAV discount) as we think that PER is more appropriate for small-mid cap property players in a slower market environment. We apply 5.0x PER to the Property segment, in line with its peers.

Note that management targets an even split in earnings between Manufacturing and Property segments. Although we are positive on Manufacturing segment’s earnings growth potential, we remain cautious on the Property segment due to SCIENTX’s Johor market focus. Hence we think a MARKET PERFORM call is warranted (previously UNDERPERFORM).

Risks to Our Call

Lower-than-expected crude oil prices,

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

Source: Kenanga Research - 18 Dec 2015