1QFY20 core earnings of RM81.6m came in within expectations, representing 21% each of our and consensus full-year estimates. No dividends were declared, as expected. We maintain our FY20-21E CNP of RM386-474m. Maintain MARKET PERFORM on an unchanged SoP-derived TP of RM9.45.

1QFY20 core net profit of RM81.6m came in within our and consensus expectations, making up 21% each of full-year estimates. No dividends were declared, as expected.

Results highlight. YoY-Ytd, topline jumped 23%, lifted by higher contributions from both segments, namely the plastic manufacturing segment (+14%, driven by higher sales) and the property segment (+61%, driven by ongoing projects as well as new launches such as Taman Pulai Mutiara in Pulai, Taman Scientex Utama in Senai, Taman Scientex in Rawang and Scientex Durian Tunggal in Melaka). Group EBIT margins improved to 13.5% (+2.9ppt) on better product mix for the manufacturing segment (+2.2ppt) while the property segment margins remained flattish (-0.7ppt). Overall CNP increased by 55%.

QoQ, topline was down by 7% mainly due to the timing of recognitions of unbilled property sales resulting in lower segment revenue (-27%) which was mitigated by improved sales from the manufacturing segment (+4%). All in, CNP was down by 34% on weaker EBIT margins at 13.5% (-5.6ppt) arising from the variability in product mix, higher financing cost (+17%) and higher effective tax rate (which normalized to 24.5% vs. 21.5%).

Outlook. SCIENTX’s manufacturing business will be focusing on ramping up the plant utilization rate to a target of c.75% over the next few years (vs. c.70% currently), coming mostly from its BOPP plant and Arizona plant in the United States. This, coupled with planned property launches of RM1.1-1.3b in FY20-21, is expected to drive overall growth going forward. Meanwhile, the group has acquired an 85.7ac leasehold agricultural land in Kota Tinggi, Johor for RM39m (translating to RM10.5psf), which we deem to be decent compared with the price range of recent land transactions in Johor between RM19 to 35psf, although the total land cost could subsequently increase on account of conversion premiums and re-zoning. Due to the small size of the acquisition cost, it will be internally funded (using its current RM241m cash pile) with fairly insignificant earnings impact (c.RM6.5m CNP p.a. or <1% of FY21 CNP) which is expected to only kick in from FY22 onwards (refer overleaf).

Maintain FY20-21E CNP of RM386-474m. Its unbilled property sales of RM700m will provide <1 year of earnings visibility. Our FY20-21 DPS of 21.6-26.6sen which are based on the Group’s payout ratio of 30% imply yields of 2.3-2.8%.

Maintain MARKET PERFORM and TP of RM9.45 based on FY20E valuations. Our TP is derived from our FY20E SoP valuation with: (i) an unchanged PER of 10.0x for the Property segment, which is on par with Johor-exposed peers’ PER given SCIENTX’s exposure in the challenging Johor property market, and (ii) a 16.0x PER for the manufacturing segment, which is at a 9% discount compared to SLP’s applied PER of 18% given its lower margins of 7% vs. SLP’s 15%, but above TGUAN (11.0x PER) given its strong earnings growth. Maintain MARKET PERFORM as we believe the stock has already priced in its earnings outlook.

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 - 18 Dec 2019