SCIENTX’s 1HFY24 results met expectations. Its 1HFY24 core net profit surged 28% YoY fuelled primarily by strong property profits. It guided for improved orders for its plastic packaging products and sustained sales of affordable homes. We maintain our forecasts but fine-tune down our TP by 2% to RM3.68 (from RM3.75). Reiterate MARKET PERFORM.

Its 1HFY24 core net profit of RM270.3m (after excluding RM9m gain on disposal of 40% equity interest in a JV) met expectations at 49% of both our full-year forecast and the full-year consensus estimate.

YoY, its 1HFY24 revenue grew 10% primarily driven by its property division (+43% YoY), which can be attributed to: (i) steady construction progress across existing projects, and (ii) robust demand for its new property launches in Sungai Dua (Penang), Sungai Petani (Kedah), Jasin (Melaka) and Pulai (Johor). In contrast, its packaging turnover fell 6% due to weak exports. Its 1HFY24 core net profit grew by a sharper 28% due to better cost control across both the plastic packaging and property segments.

QoQ, its 2QFY24 top line and bottom line remained largely stable, indicating resilience amidst headwinds in both the domestic and global economies. Its packaging profits surged 27% due to a better product mix, partially cushioning an 8% reduction in property profits, we believe, due to normal quarterly fluctuation on lumpy recognition of profits and costs.

The key takeaways from its results briefing are as follows:

1. The company has seen a gradual improvement in customer orders in recent months, mainly fuelled by industrial packaging which caters to the logistics and shipping sectors. It recorded a single- digit growth in its packaging sales volume in 2QFY24 with utilisation rate of between 55% and 60%, which should move above 60% over the immediate term.

2. It recently completed the installation of its second solar photovoltaic (PV) project at its Klang plant in 4QCY23. With this, the company has realised about 10% savings on its energy costs for both Chemor and Klang plants. It remains committed to investing in solar PV systems across its manufacturing plants in Malaysia to mitigate high energy costs and reduce its carbon footprint.

3. It garnered a remarkable take-up rate exceeding 90% for its maiden project launch in Ipoh (Perak) in Jan 2024. The development comprises 238 units of double-storey terrace houses, with a GDV amounting to RM62.9m. Additionally, the company anticipates another launch, the Scientex Ipoh, in CY24. Over the years, the company has consistently achieved a take-up rate of 80%-90% for most of its affordable housing projects launched within six months.

Outlook. We expect gradual improvement for its packaging segment on the recovery of manufacturing activities and global consumer spending. In addition, we believe SCIENTX is poised to capitalise on strong demand for affordable housing. The acquisitions of land in Muar (Johor) and Bestari Jaya (Selangor) are expected to be completed by 2HCY24 and 1HCY25 respectively, which will sustain its project pipeline.

Forecasts. Maintained.

Valuations. We fine-tune down our TP by 2% to RM3.68 (from RM3.75) as we recalibrate our property valuation based on the latest outstanding GDV guidance. Additionally, we roll forward our valuation base year to FY25F (from FY24F). Our revised TP values its packaging business at an unchanged 12x 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).

Investment case. We like SCIENTX for: (i) its competitiveness in the global plastic packaging industry given its size and low-cost structure (especially, as compared to its overseas rivals), and (ii) its strong foothold in the affordable housing segment in Johor. However, we believe its current valuations have fully reflected its fundamentals. Reiterate MARKET PERFORM.

Risks to our call include: (i) a sudden spike in resin prices, (ii) weak consumer demand for packaging materials due to prolonged global economic downturn, and (iii) high inflation, elevated mortgage rates and a weak job market, hurting demand for its properties.

Source: Kenanga Research - 27 Mar 2024