9M18 core earnings of RM201.3m came below our (69%) and consensus (68%) estimates on weaker-than-expected recognition for the property segment. Dividends were also below (58%). We lower FY18-19E CNP by 13-8% on softer recognitions in FY18 and back-loaded launches in FY19. Even so, despite a lower TP of RM6.90 (from RM7.35), the steep share price decline YTD (23%) permits an upgrade to MARKET PERFORM (from UP).

9M18 core net profit of RM201.3m came in below our and consensus estimates at 69% and 68%, respectively. Top-line came in below, at 65%, which we believe was due to weaker-than-expected recognition for the property segment from latest projects such as Taman Scientex Durian Tunggal, Melaka and Scientex Meru, which are in the early stages of construction progress. Additionally, the segment was also impacted by longer-than-expected timeframe in attaining regulatory approval and permit for some of the projects due to uncertainty during the election period. A single tier interim dividend of 10.0 sen was announced, which was also below (58%) our FY18E dividend of 17.2 sen.

Results highlight. QoQ, top-line declined by 5% mainly due to lower revenue recognized from the property segment (-17%), as recent launches are still in the early stages of progress billings, while the manufacturing segment declined marginally (-1%). As a result of lower contributions from the property segment, Group PBT margin also declined marginally by 0.7ppt. All in, CNP declined by 10% to RM61.1m. YoY-Ytd, CNP increased by 10% mainly driven by top-line growth (+8%) on better contributions from the manufacturing segment (+12%). This was on the back of flattish margin of 10.6% (vs. 10.4%).

Outlook. SCIENTX is focused on ramping up its plants utilization, targeting 70% over the next few years (vs. c.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 rate for the manufacturing segment in FY18- 19 of 62-65%, and (ii) full-year contribution from KHPI in FY19.

Lower FY18-19E CNP by 13-8% to RM256-293m on lower revenue recognition in FY18, while we have also back-loaded some of FY19 launches on marginally lower recognitions. All in, we are expecting launches of RM700-800m in FY18-19 (vs. RM900-1,100m).

Upgrade to MARKET PERFORM (from UP) but lower TP to RM6.90 (from RM7.35) 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) 15.8x applied PER for the manufacturing segment. We are comfortable with our MARKET PERFORM as share price has seen a steep decline YTD (-23%) while we believe that we have accounted for foreseeable earnings risks going forward.

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

Source: Kenanga Research - 21 Jun 2018