SCIENTX’s 1QFY23 results disappointed on higher operating cost in both plastic packaging and property development segments. We now expect a more subdued FY23 due to weaker demand for plastic packaging amidst a global slowdown and poor sentiment in the local property market. We cut our FY23-24F net profit by 13- 4%, reduce TP by 10% to RM2.99 (from RM3.32) but maintain our MARKET PERFORM call.

Missed expectations. 1QFY23 core profit came in below expectations at only 20% and 22% of our full-year forecast and the full-year consensus estimates, respectively. The variation against our forecast came largely from higher operating cost that hurt margins.

YoY, 1QFY23 revenue grew by 11% thanks to: (i) a 6% top line growth at the plastic packaging segment, and (ii) a 26% jump in property turnover on economy reopening. However, 1QFY23 core profit only grew 5% mainly due to efficiency loss amidst labour shortage and higher operating cost.

Outlook. We expect softer growth for its plastic packaging segment, dragged down largely by industrial plastic packaging (vs. consumer plastic packaging) on a slowing global economy. Not helping either is the elevated operating cost. Similarly, we are cautious on its property development segment on poor sentiment on the back of rising interest rates.

Forecasts. We cut our FY23-24F net profit by 13-4% largely to reflect higher operating cost and weaker property sales.

We like SCIENTX for: (i) the expanding global market share of the local plastic packaging industry due to production curbs in other parts of the world, especially in Europe, due to high energy cost or energy supply constraints, (ii) its strong market position, being the largest flexible plastic packaging manufacturer in the region, and (iii) its earnings growth driven by expansion, i.e. a robotic stretch film plant in Shah Alam, Selangor and a blown film plant in Chemor, Perak. However, its near-term demand outlook is weakening on the back of a slowdown in the global economy.

We cut our TP by 10% to RM2.99 (from RM3.32), having: (i) rolled forward our valuation base year to FY24F (from FY23F); and (ii) reduced our PE multiple to 12x (from 14x).

At 12x, we value the stock at a reduced premium of only 2x (from 4x) to the sector’s average forward PER of 10x. While we believe SCIENTX deserves a premium to the sector given its size, the premium should be lower now given the cloudy outlook amidst a slowing global economy (see Page 2 for our SoP valuations). There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain MARKET PERFORM.

Risks to our call include: (i) sustained higher resin cost, (ii) recovery in demand for packaging materials from the pandemic cut short by a global recession, and (iii) prolonged labour shortages.

Source: Kenanga Research - 9 Dec 2022