SCIENTX’s share price rallied for a second day after it posted record earnings for FY16 (Core NP: RM248m +66.2% YoY) At the closing bell yesterday, the share price was up by 23.0 sen (3.5%) at RM6.75, building upon the previous day’s 22.0 sen gain.

As a brief recap on earnings, the strong full year numbers were driven largely by manufacturing improvements, both on top line (+20%) and EBIT level (+62%) on new contribution from its Ipoh acquisition, favourable USD and lower resin costs, which increased EBIT margins from 6% to 8%. Meanwhile, revenue from the property segment improved 26% but EBIT rose by only 7% as its focus on affordable housing reduced EBIT margin from 34% to 29%.

Going forward, we expect the manufacturing segment to remain the engine of growth, underpinned by the new BOPP plant which is set to contribute to earnings in the coming quarter (1Q17). At the same time, expansion is underway from the Rawang and Ipoh plants, each adding 25% (to 60k MT/year) and +43% (to 24k MT/year) to total capacity, respectively, which are expected to bring earnings to greater heights.

Based on our charting, SCIENTX has broken out of a “Symmetrical Triangle” pattern, and is poised to climb towards RM7.36 (+7.4%) over the coming weeks. Investors who wish to gain a leveraged exposure may consider SCIENTX-CD (strike RM6.50) which offers a high effective gearing of 4.3x. This means that a 7.4% gain in the underlying price would, ceteris paribus, translate to an approximate 32% increase in SCIENTX-CD to RM0.13.

Structured Warrant Strategy:

SCIENTX-CD (strike RM6.50) is the only Structured Warrant in the market which provides a leveraged exposure to the underlying share price movements at the moment. Currently, it offers an effective gearing of 4.3x and is trading In-The-Money with more than three months till expiry. Risks are relatively higher given the shorter timeframe to maturity. However, it is sufficient for our trading strategy to play out with ample buffer against time decay. Regardless, investors should bear in mind that Structured Warrants are not meant to be held to expiry and carry with them the possibility of expiring worthless. Rather, they should be traded based on the short-term volatility of the underlying stock.

Source: Kenanga Research - 29 Sep 2016