1H18 core earnings of RM140.2m came below our and consensus estimates on weaker-than-expected utilisation rates. No dividends, as expected. We lower FY18-19E CNP by 16-15% on lower utilisation rates and USD/MYR assumptions. FY18E CNP will be driven by manufacturing capacity (+44% YoY), and FY19E on improved utilisation, inclusion of KHP and stable property contributions. Maintain MARKET PERFORM but lower TP to RM7.75 (from RM9.00).

1H18 core net profit of RM140.2m came in below our and consensus estimates at 40% and 42%, respectively. We believe the weaker-thanexpected results were due to our and consensus bullish topline assumptions as we expected improved utilization rates from the ramp up of the new capacity at the Pulau Indah BOPP plant, Ipoh plant and Arizona plant in FY18. All in, topline only made up 40% of our estimate as we expected utilization rates of 70-85% in FY18-19 vs. current levels of c.60%. No dividends, as expected.

Results highlight. QoQ, topline declined by 4% on lower sales from both the property and manufacturing segment. All in, weaker EBIT margins (-1.0ppt) and marginally lower tax rates (19% vs. 21%) caused bottom-line to decrease by 6%. YoY-Ytd, topline was up by 15% driven by both segments; (i) manufacturing, from higher export sales as the biaxially oriented polypropylene film (BOPP) plant ramped up capacity, and (ii) property segment on steady construction progress from existing projects in Johor, Melaka and Perak. All in, CNP margin improved by 1.0ppt on lower financing cost (-35%), increasing CNP by 20%.

Outlook. SCIENTX’s is focused on ramping up utilisation, targeting 70% over the next few years (vs. 60% currently), mostly from its BOPP plant and Arizona plant in the United States which will mostly contribute from FY19 onwards. FY18 CNP growth will be driven by increased manufacturing capacity (+44% YoY) to 455k MT p.a. While we do not expect additional capacity in FY19, growth is premised on; (i) increased utilisation rates for the manufacturing segment in FY18-19 of 62-65%, (ii) full-year contributions from KHPI in FY19, and (iii) stable earnings from the property segment. Unbilled sales of RM500m will be recognized over 2-3 years, while the Group is targeting RM800-1,100m worth of launches in FY18.

Lower FY18-19E CNP by 16-15% to RM293-318m post accounting for; (i) lower utilisation rates of 62-65% in FY18-19 (vs. our previous estimates of 70-85%), and (ii) lower USD/MYR assumptions to RM3.90 (vs. RM4.10 previously) in line with our in-house estimates.

Maintain MARKET PERFORM but lower TP to RM7.75 (from RM9.00) post lowering our earnings for FY19E valuations. Our TP is based on our Sum-of-Parts (SoP) FY19E 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 we believe foreseeable risks and upsides have been discounted.

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 - 23 Mar 2018