1HFY20 core earnings of RM181.4m came in within our and consensus estimates at 47% and 46%, respectively. No dividends, as expected. All in, we lower FY20E CNP marginally by 2.5% imputing the challenging demand environment for manufacturing, and maintain FY21E CNP of RM474m. Maintain MARKET PERFORM but on a lower SoP derived TP of RM8.90 (from RM9.45) on lower earnings and valuations.

1HFY20 core net profit of RM181.4m came in well within our and consensus estimates at 47% and 46%, respectively. No dividends, as expected.

Results’ highlight. YoY-Ytd, top-line jumped by 21% from contribution in both segments with the plastic manufacturing segment (+17%), driven by higher sales, while the property segment revenue (+34%) was up on ongoing recognitions for projects in Johor, Melaka, Selangor and Perak. EBIT margin improved (+2.4ppt) for the manufacturing segment on increased product efficiency and better product mix. All in, CNP was up by 44%. QoQ, top-line was up by 4% mainly driven by stronger property segment (+15%) on higher recognitions while the manufacturing segment was rather flattish (+1%). However, due to EBIT margin improvement (+1.9ppt) due to reasons mentioned above, CNP was up by 22%.

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 on launches of RM1.1-1.3b in FY20-21 for the property segment.

Earnings largely unchanged. We lower FY20E CNP marginally by 2.5% for now to RM376m on lower manufacturing sales to be conservative in light of challenging market environment arising from the Covid-19 situation, while FY21E CNP remains unchanged at RM474m. Unbilled sales of RM750m provides <1 year of visibility. FY20-21 dividends of 21.1-26.6 sen are based on its payout ratio of 30% implying yields of 2.4-3.0%.

Maintain MARKET PERFORM but on a lower TP to RM8.90 (from RM9.45) on FY20E valuations Our TP is based on our FY20E SoP valuation with; (i) unchanged PER of 10.0x for the Property segment, which is on par with Johor-exposed peers given SCIENTX’s exposure in the challenging Johor market, and (ii) a lower 15x (from 16.0x) applied PER for the manufacturing segment which is at a 9% discount compared to SLP’s applied PER given its lower margin of 9% vs. 15%, but above TGUAN (11.0x PER) given its strong earnings growth. We will continue to monitor the situation closely and may look to up our valuations for the manufacturing segment once concerns of Covid-19 and the challenging market conditions abate. Maintain MARKET PERFORM as we believe we have priced in most foreseeable 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 - 12 Mar 2020