9M19 core earnings of RM198.8m came in below our (64%) and consensus (64%) estimates on weaker-than-expected property margins as our assumptions may have been too bullish. All in, we lower our earnings marginally by 10-6% to RM280-331m on lower property margins closer to current levels. Maintain MARKET PERFORM but on a lower TP of RM8.15 (from RM8.50).

9M19 core net profit of RM198.8m came in below our (64%) and consensus (64%) estimates mainly on weaker-than-expected property segment EBIT margins of 30% (vs. our expectations of 33%), while we also expected stronger recognitions in 2H19 to bolster earnings. Top-line came in at 72% of our estimates driven by the plastics segment, but EBIT only came in at 68%, as our initial property EBIT margin assumptions may have been too bullish. We believe the deviation from consensus estimates were likely due to expectations of stronger billings in 2H19. A single tier interim dividend of 10.0 sen was announced, which was also below (41%) our FY19E dividend of 24.2 sen.

Results highlight. YoY-Ytd, top-line was up by 23% from contribution in the plastic manufacturing segment (+25%), driven by contribution from the acquisition of Klang Hock Plastic, operations in the United States and better utilization rates, while the property segment revenue (+15%) was up on ongoing projects as well as new launches such as Taman Scientex Utama in Senai, Taman Pulai Mutiara in Pulai, Scientex Durian Tunggal in Melaka and Taman Scientex in Rawang. However, Group EBIT margin declined by 1.4ppt on weaker margins from the plastic segment likely on a less than favorable product mix, while property margins declined slightly by 0.8ppt. This coupled with higher effective tax rate of 24% (from 20%), caused CNP to decline by 1%. QoQ, topline is up by 8% on due to similar reasons mentioned above. EBIT margins declined slightly (-1.2ppt) likely due to a less than favorable mix for the plastic segment, and on the back of higher financing cost (+13%) and higher tax (+4%), which caused CNP to decline slightly by 2%.

Outlook. SCIENTX is focused on ramping up utilisation, targeting c.75% over the next few years (vs. c.70% currently), mostly from its BOPP plant and Arizona plant in the United States which will mostly contribute from FY19 onwards. Growth is premised on gradual improvement in utilisation rate for the manufacturing segment, and (ii) full-year contribution from KHPI in FY19.

We lower FY19-20E CNP by 10-5% to RM280-331m as we lower our property segment margin assumptions to 30-32% closer to current levels (from 33-35%). We are expecting launches of RM1.1-1.3b in FY19-20, and manufacturing utilisation rates of 70-75% in FY19-20. Unbilled sales of RM750m provides <1 year of visibility.

Maintain MARKET PERFORM but on a lower TP to RM8.15 (from RM8.50) on FY20E valuations post lowering our FY20E earnings. Our TP is based on our FY20E SoP valuation with; (i) unchanged PER of 10.0x for the Property segment, which is at a 18% discount to smallmid-cap property players and Johor-exposed peers’ PER due to SCIENTX’s exposure in the challenging Johor market, and (ii) an unchanged 15.5x applied PER for the manufacturing segment (a 14% discount compared to SLP’s applied PER given its lower margins of 6- 7% vs. 15%, but above TGUAN (9.0x PER) given its earnings stability. Maintain MARKET PERFORM as we believe we have priced in most foreseeable positives as well are downsides for now.

Risks to our call include; (i) higher/lower-than-expected resin cost, (ii) stronger/weaker product demand from overseas, (iii) stronger/weakerthan-expected property sales, and (iv) foreign currency risk from weakening Ringgit.

Source: Kenanga Research - 27 Jun 2019