FY19 core earnings of RM331.2m came in above our (119%) and consensus (108%) estimates on stronger-than-expected property, and plastic margins on improving product mix. All in, we increase FY20E earnings by 16% to RM386m, and introduce FY21E CNP of RM474m on improved margins closer to current levels. Maintain MARKET PERFORM but on a higher TP of RM9.45 (from RM8.15).

FY19 core net profit of RM331.2m came in above our (119%) and consensus (108%) estimates. Topline came in within expectations at 98%, but the deviation from our estimate was from higher-than expected EBIT margin of 14% (vs. our expectations of 11.4%) from both segments; (i) property segment margins (32% vs. ours of 30%), and (ii) plastic manufacturing segment margins of 7.4% (vs. ours of 6.0%). A final dividend of 10.0 sen was announced, bringing FY19 NDPS to 20.0, below our expectation at 91%.

Results highlight. YoY-Ytd, top-line jumped by 25% from the plastic manufacturing segment (+24%), driven by higher contribution from stretch film sales, while the property segment revenue (+27%) 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. All in, CNP increased by 16% on the back of higher effective tax rate (23% vs. 19%) and finance cost (+44%). QoQ, topline was up by 13% mostly on stronger billings for the property segment which came in during the quarter. However, strong EBIT margin (+6.6ppt) was driven by both segments; (i) property segment due better margins for project billings this quarter namely Taman Scientex Utama in Senai, Scientex Durian Tunggal in Melaka and Taman Scientex in Rawang , and (ii) plastic manufacturing margins on a better sales mix and product margins as a result of softer raw material prices. As a result, bottomline was up by 83% on the back of slightly lower effective tax rate of 21.5% (vs. 24.9%).

Outlook. SCIENTX’s manufacturing segment 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. Growth is premised on gradual improvement in utilisation rate for the manufacturing segment, and (ii) full-year contribution from KHPI in FY19.

We increase FY20E CNP by 16% to RM386m and introduce FY21 numbers. Our higher FY20 CNP is on the back of stronger margins for both segments; (i) property segment to 32-33% for EBIT margins in FY20-21E (vs. 30% in FY20), and (ii) plastic manufacturing segment to 7% for EBIT margins (from 6.0%). We are expecting launches of RM1.3-1.3b in FY20-21, and manufacturing utilisation rates of 70-75% in FY20-21. Unbilled sales of RM780m provides <1 year of visibility.

Maintain MARKET PERFORM but on a higher TP to RM9.45 (from RM8.15) on FY20E valuations post increasing our FY20E earnings. Our TP is based on our FY20E SoP valuation on: (i) unchanged PER of 10.0x for the Property segment, which is at a 15% discount to small mid-cap property players and Johor-exposed peers’ PER due to SCIENTX’s exposure in the challenging Johor market, and (ii) a slightly higher 16.0x applied PER for the manufacturing segment (from 15.5x) on improved margins, which is at a 9% discount compared to SLP’s applied PER given its lower margin of 7% vs. 15%, but above TGUAN (9.0x PER) given its strong earnings growth. Maintain MARKET PERFORM as we believe we have priced in most foreseeable positives as well as downside risks for now.

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

Source: Kenanga Research - 27 Sept 2019