1Q18 core earnings of RM69.8m came within our and consensus estimates. No dividends, as expected. No changes to FY18-19E earnings where we are expecting its manufacturing capacity to increase to 340k MT p.a (+12% YoY) in FY18, while for FY19, earnings growth is premised on higher utilisation rate and stable property segment. Maintain MARKET PERFORM and TP of RM8.43.

1Q18 core net profit of RM69.8m is within our (20%) and consensus (21%) estimates. No dividends, as expected.

Results highlight. QoQ, CNP was up by 2% mainly due to decent topline growth (+2%) backed by the growth in manufacturing segment (+8%) on improved export sales, which negated the impact from the decline in its property segment (-10%) due to lower recognition. Although EBIT margin saw mild improvement (+1.0ppt), higher effective tax rates this quarter caused flattish CNP margin. YoY-Ytd, top-line was up by 23% driven by both segments; (i) manufacturing, from higher export sales 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% (from 10%) on (i) better manufacturing and property EBIT margins likely due to a better product mix, and (ii) lower financing cost (-33%).

Outlook. SCIENTX’s consumer packaging plant expansion is expected to complete by end-CY17, while the Group will focus on ramping up capacity going forward. Its industrial packaging segment is focused on expansion in the United States with contributions (<5% to earnings) accreting mostly in FY19. We believe the Group will allocate c.RM140- 100m for capex in FY18-19. The Group is targeting RM800-1,000m worth of launches in FY18.

Maintain FY18-19E CNP of RM347.3-360.8m. FY18 CNP growth will be driven by increased manufacturing capacity (+12% YoY) to 340k MT p.a. While we do not expect additional capacity in FY19, growth is premised on increased utilisation rates for the manufacturing segment in FY18-19 of 70-85%, and stable earnings from the property segment.

Maintain MARKET PERFORM and TP of RM8.43. Our TP is based on our Sum-of-Parts (SoP) FY18E valuations with; (i) 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 (ii) 17.4x applied PER for the manufacturing segment. We are comfortable with our MARKET PERFORM call as foreseeable upsides and risks have been accounted for.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand from overseas, (iii) weaker-than-expected property sales, (iv) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share.

Source: Kenanga Research - 7 Dec 2017