SCIENTX’s FY23 results met expectations. Its FY23 core net profit grew 17% YoY as stronger property profits more than offset weaker showing from the plastic packaging division. The outlook for its plastic packaging segment will remain weak amidst the global economic slowdown, while the demand for its affordable homes will remain stable. We maintain our FY24F numbers but raise our TP by 8% to RM3.23 (from RM2.99). Maintain UNDERPERFORM.

Within expectations. Its FY23 core net profit of RM461.6m met expectations.

Results’ highlights. YoY, its FY23 turnover increased 2%, mainly driven by a 29% rise in property turnover, partially offset by an 8% decline in packaging turnover. The boost in property turnover was attributed to: (i) higher sales and healthy construction progress of affordable property developments, and (ii) strong take-up of more than 80% for its new project launches. Its packaging segment, on the other hand, faced reduced demand for its products due to a softer global market amidst the ongoing economic slowdown.

Its FY23 core net profit grew 17%, which was contributed by better performance from its property segment (+26% YoY), as it experienced higher sales and steady construction progress from its ongoing property development projects, coupled with ease of hurdle in obtaining authority approval for these projects. However, the packaging profits dropped by 13% due to rising operating costs, particularly higher energy costs.

QoQ, its 4QFY23 turnover improved 7%, primarily attributed to higher progress billings from its ongoing projects in Bandar Jasin, Kundang and Tasek Gelugor. Its 4QFY23 core net profit increased by a larger 20%, mainly driven by a 15% increase in property profits. Note that we excluded the goodwill impairment on Myanmar operations of RM22.7m in deriving 4QFY23 core PATAMI since it is a non-recurring item.

The key takeaways from its results briefing are as follows:

1. Its new automated bag making machine at its Ayer Keroh Plant is anticipated to commence operations in 4QCY23, enhancing its competitiveness in pet food packaging production. This new machine is expected to reduce labour requirements and improve production efficiency (e.g. able to reduce workforce from 90 to 10 employees for a similar capacity).

2. The company is actively working on its rooftop solar photovoltaic (PV) panel project to mitigate energy cost pressures, as well as to reduce carbon footprint as part of its sustainability efforts. The installation of its second solar PV panel project at its Klang manufacturing plant is expected to be completed in 4QCY23. This initiative aims to generate renewable energy to cover 10% to 15% of the plant’s electricity requirements.

3. Its unbilled property sales stand at RM1.76b vs. RM1.6b in 2QFY23. It is optimistic of improved sales supported by: (i) resilient demand for its affordable housing, and (ii) new launches in Sungai Dua, Penang. The first phase of Sungai Dua Project, consisting of 309 units of double-storey terrace houses was successfully launched in June 2023.

4. It has entered into a joint venture with Mustika Land (Indonesian real estate developer) and Creed Group (Japanese real estate investment group) to build affordable homes in Jakarta, Indonesia. The project is expected to start construction in early 2024, with Phase 1 development size of 12 acres. The GDV for this project is estimated at approx. USD19m. This strategic move aims to expand SCIENTX’s footprint in the vast Indonesian affordable housing market.

5. SCIENTX provided a RM1b capex guidance for FY24, with the main focus being its land bank expansion, as well as acquisition of new packaging machinery.

Outlook. SCIENTX is hopeful for better performance from its packaging segment in FY24, as customers’ inventories are expected to continue depleting, potentially signaling upcoming restocking activities. Nevertheless, we maintain a cautious outlook on its packaging segment as we believe this uptick is more likely to be a cyclical improvement rather than a strong structural rebound. The short-term prospects for the plastic packaging segment are expected to remain challenging, as there is still no significant pick up in demand in the global market due to weakened consumer confidence. Not helping either are the elevated operating costs, particularly higher energy and labour costs.

On a positive note, SCIENTX anticipates higher property sales in FY24 as they continue to see robust demand for its newly launched affordable homes in Peninsular Malaysia. Notably, the recent land acquisitions in Jenjarom, Selangor, as well as Tebrau amd Kulai in Johor, are expected to be completed in FY24, which will contribute to improved performance in the near future. We align with this optimistic outlook for its property segment, primarily due to the impressive take-up rate of over 80% for its new affordable housing launches.

Forecasts. We maintain our FY24F earnings and introduce our FY25F numbers.

We raise our SoP-TP by 8% to RM3.23 (from RM2.99) after we recalibrate our valuation for its property business (see Page 4). Our revised TP values its packaging business at an unchanged 12x FY24F PER, at a premium to sector’s average forward PER of 10x to reflect its size, being one of the largest players in the region. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We like SCIENTX for: (i) the expanding global market share of the local plastic packaging industry due to cost advantages compared to overseas competitors, (ii) its strong market position, being the largest flexible plastic packaging manufacturer in the region, and (ii) the robust demand for its affordable housing with overwhelming take-up achieved. However, its near-term demand outlook for packaging products is weighed down by the global economic slowdown and we deem its valuations rich. Maintain UNDERPERFORM.

Risks to our call include: (i) a stronger and sooner recovery in the global economy, (ii) easing of input costs, and (iii) easing of interest rates and inflation, resulting in strong demand for its properties.

Source: Kenanga Research - 21 Sept 2023