Period

2Q16/1H16 Actual vs. Expectation

1H16 Core Net Profit (CNP*) of RM131.4m exceeded consensus (full-year forecast of RM231.5m) and our forecast (full-year estimate at RM224.9m) at 57% and 58%, respectively. This was due to better-than-expected margins from the manufacturing division following the its new Ipoh acquisition, increased efficiency, higher export sales and lower effective tax rates.

Dividends

No dividend was declared, as expected. Key highlights

YoY-Ytd, CNP jumped 98% driven by manufacturing margins which doubled to 10%, resulting in manufacturing EBIT surging 139%. This was largely due to higher proportion of consumer packaging mix (+36%) as well as lower resin cost (c.USD1,100- 1200/MT or -20-27%). Property EBIT improved 16%, on higher recognitions. Additionally, effective tax rate was lower at 19% (vs. 22%) from recognition of Reinvestment Allowance in 2Q16.

QoQ, CNP only increased by 4% as topline was dragged down by the property segment on weaker EBIT margins (25% vs. 30%) and lower recognition during the period, while manufacturing EBIT saw minimal growth (+2%) and flattish margins. However, the saving grace was lower finance cost (-16%) and effective tax rate (17% vs. 22%).

Outlook

For the manufacturing segment, we understand that SCIENTX intends to add another 3.6m MT of PE film capacity in Rawang and Ipoh in addition to its existing expansion plans. The new capacity is expected to contribute to 2H17 earnings.

For the property segment, 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 12-20% to RM252-292m to account for higher margins in the consumer packaging sub-segment as well the new expansion plan for its Ipoh facilities.

Rating

Maintain MARKET PERFORM Although we are positive on the manufacturing segment’s earnings growth potential, we remain cautious on the property segment due to its Johor market focus. Nevertheless, the excitement from the recent bonus issue announcement may provide a short-term boost to the share price.

Valuation

We increase our TP to RM13.25 (ex-bonus TP: RM6.63) from RM9.49 based on Sum-of-Parts as we upgrade our earnings and roll forward our base year to CY17, in line with the sector.

For the manufacturing segment, we use an applied PER of 14.0x, which reflects higher future contribution from consumer packaging products. Post-expansion, the consumer packaging capacity is expected to make up c.50% of total capacity, from 36% currently. Our applied PER reflects a 10% discount to pure consumer packaging players’ applied PER of 15.5x.

As for the property segment, we use a target PER of 5.0x as we think that PER is more appropriate for small-mid cap property players in a slower market environment. Our target PER is in line with the peers’ average.

Risks

Lower-than-expected crude oil prices.

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

Source: Kenanga Research - 23 Mar 2016