FY17 core net profit of RM255.0m is within our (96%) but slightly below consensus (93%) FY17E estimates. We believe the deviation from consensus estimate was likely due to an overly bullish top-line (86%) likely on expectations of stronger contributions from the BOPP plant (opened in Sept 2016), and expansions at its Rawang and Ipoh plants. A single-tier final dividend of 10 sen was declared implying FY17 total dividend of RM75.8m or 14.9 sen post accounting for the enlarged share base from the bonus issue (completed Aug 2016) and up to 10% private placement (1st tranche completed May 2017). This is also within our expectation at 95% of our FY17E dividend of 15.6 sen.

Results highlight. QoQ, CNP improved by 8% making 4Q17 the strongest quarter to date, driven by decent top-line growth (+2%) from both segments; (i) manufacturing, as the biaxially oriented polypropylene film (BOPP) plant continued to ramp up capacity, and (ii) property segment on steady construction progress from existing projects. CNP margin also improved to 11.1% (from 10.4%) due to: (i) slightly lower finance cost (-17%), and (ii) lower tax rates (-8.0ppt) on tax incentives. YoY-Ytd, top-line was up by 9% due to similar reasons, while CNP increased by 3%. The drag on CNP growth vs. topline was due to lower EBIT margins (-1.3ppt) on higher startup cost for the BOPP and cast polypropylene (CPP) plants, as well as penetrative pricing strategies which lowered product margins.

Outlook. The Group expects its consumer packaging plant expansion to be completed by end-CY17, and will focus on ramping up capacity going forward, while the industrial packaging segment is focused on expansion in the US with contributions accreting mostly in FY19. All in, we expect total capacity to increase to 340k MT p.a (+12% YoY) by end FY18, and utilisation to ramp up to 70-85% in FY18-19. We believe the Group will allocate c.RM140-100m for capex in FY18-19, which we have accounted for in our estimates. As for the property segment, the Group has launched 16 projects worth RM617m in FY17, which includes maiden launches in Ipoh, mainly consisting of affordable properties. Unbilled sales of RM500m will be recognized over 2-3 years while the Group is targeting RM800-1,000m worth of launches in FY18.

Maintain FY18E NP of RM347m and introduce FY19E NP of RM361m. We do not expect additional capacity in FY19 (total capacity of 340k MT p.a in FY18), but FY19 growth is premised on increased utilisation for the manufacturing segment in FY18-19E of 70-85%, and stable earnings from the property segment.

Maintain MARKET PERFORM and TP of RM8.50. Our TP is based on our Sum-of-Parts (SoP) FY18E valuations, applying an unchanged 6.8x PER for the Property segment, which is at a 10% discount to small-mid-cap property players due to SCIENTX’s exposure in the challenging Johor market, and 17.6x applied PER for the manufacturing segment. We are comfortable with our MARKET PERFORM call as foreseeable upsides and risks have been accounted for.

Source: Kenanga Research - 20 Sep 2017