FY18 core earnings of RM291.7m came in above our (114%) and consensus (107%) estimates on stronger-than-expected margins, mainly from the property segment. Dividends were also above (132%). As a result, we increase FY19E CNP by 6% to RM309m on better property margins, and introduce FY20 numbers. All in, we up our TP to RM7.80 (from RM7.40) on increased earnings but maintain our UNDERPERFORM call as most foreseeable upsides have been priced in.

FY18 core net profit of RM291.7m came in above our and consensus estimates at 114% and 107%, respectively. Top-line came in within, at 103%, but we believe the deviation from our estimates were due to better-than-expected CNP margins in FY18 of 11.1% (vs. our estimate of 10.0%), mainly because of better-than-expected property margins in 4Q18 (at 40% EBIT margin vs. 30% in 3Q18) on the back of cost savings from better operational efficiency and improved product mix. A single-tier interim dividend of 10.0 sen was announced, which brings FY18 dividend to 20.0 sen, which is also above our estimates (132%).

Results highlight. QoQ, top-line increased by 22% contributed mainly by the property (+39%) as well as manufacturing (+17%) segments. This was also on the back of significantly better property EBIT margin of 40% (vs. 30%) contributed from projects in Johor, Melaka and Ipoh on better operating efficiency and product mix. This coupled with lower effective tax rates of 16.5% (vs. 18.6%), caused CNP to increase by 48%. YoY-Ytd, top-line was up by 9% mostly on contributions from the manufacturing segment (+14%) on improved sales as well as contributions from Klang Hock Plastic Industries Sdn Bhd (KHPI), while the property segment’s revenue declined marginally by 2%. EBIT margin improved marginally to 13.9% (from 13.5%) from contributions from both segments. This, coupled with lower financing cost (-23%) caused CNP to increase by 14%.

Outlook. SCIENTX’s is focused on ramping up utilisation, 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. We do not expect additional capacity in FY19-20 for now, but growth is premised on gradual improvements in utilisation rates for the manufacturing segment, and (ii) full-year contributions from KHPI in FY19.

Increase FY19E CNP by 6% and introduce FY20E numbers. We are expecting launches of RM800-850m in FY19-20, as we increase our property EBIT margin slightly to 35% (from 32% previously) on the segment’s strong margin improvements this quarter (EBIT margin of 40%), and maintain manufacturing sector utilisation rates of 65-70% in FY19-20 on capacity of 450k MT p.a. All in, we increase FY19E CNP by 6% to RM309m, and introduce FY20E CNP of RM333m, with dividend yields of 2.8-3.0% in FY19-20.

Maintain UNDERPERFORM but increase TP to RM7.80 (from RM7.40) on increased earnings. Our TP is based on our Sum-of- Parts (SoP) FY19E valuations with an unchanged PER of 10.0x for the Property segment and an unchanged 14.0x applied PER for the Manufacturing segment. Results have been weak in previous two quarters, missing expectations, while earnings improvements this quarter were mostly driven by the property sector of which we are not overly bullish on. As such, we are comfortable with our UNDERPERFORM call as our in-house property analyst has reservations on the sustainability of the strong margins and maintains a neutral outlook on the sector in light of macro uncertainties and margin pressures.

Source: Kenanga Research - 21 Sept 2018