SCIENTX’s FY24 results met expectations. Despite marginally lower revenue, profit expansion in the packaging business was preserved by efficiency gains. The primary factor for the 17% YoY growth in FY24 core net profits was its robust property earnings as its focus on the affordable housing segment has been bearing fruit. Pencilling in encouraging take-up rates on recent projects, more similar launches are anticipated following active land acquisitions in FY24. These should continue to do well, resulting in us nudging up FY25F earnings by 2%, and in turn lifting our TP by 4% to RM4.15 (from RM4.00). Our new TP commensurates with a MARKET PERFORM from previously UNDERPERFORM.

SCIENTX’s FY24 core net profit of RM538.0m met expectations. It declared a DPS of 6 sen in 4QFY24, bringing FY24 dividend to 12 sen which was in line with our expectation.

YoY, its FY24 turnover expanded by 10%, driven mainly by its property segment (+30% YoY) due to steady construction progress and robust demand for new launches in Sungai Dua (Penang), Jenjarom (Selangor), Pulai and Senai (Johor). Meanwhile, its packaging revenue remained flat as weaker consumer packaging demand was offset by better industrial packaging exports.

Its core net profit grew by a sharper 17%, thanks to improved margins from better packaging product mix and enhanced operational efficiency.

QoQ, its 4QFY24 top line inched up by 5% while bottom line rose by 9% largely due to lower effective tax rate. Note that we excluded the RM4.5m forex loss in deriving 4QFY24 core net profit.

The key takeaways from the results briefing are as follows:

1. SCIENTX guided for slow demand recovery in the packaging division especially in consumer packaging due to constrained purchasing power as well as competitive pricing environment. The current utilisation rate remained around 55%, which is similar to FY23. However, as FY24 production capacity is slightly (4%) higher, the flattish utilisation rate does imply a modest uptick in FY24 orders.

2. SCIENTX recently invested in a new co-extrusion tandem coating or lamination line to target liquid and paste packaging products in the F&B and FMCG sectors. This new machine can laminate multiple layers in a single process thus reducing manpower and improving cost efficiency.

3. Its two Klang Valley new property launches in Jenjarom and Cheras saw strong demand. In the former, shop offices launched in Apr 2024 were fully taken up while two of its residential launches in the same location launched in May and June hit take-up of 95% and 70%, respectively. In the latter, its shop offices in Cheras achieved an 85% take-up rate, with a residential launch planned for FY25.

4. It launched RM1.9b GDV in FY24 with 6,336 units across West Malaysia and aims for at least RM2b GDV in FY25, with several land bank acquisitions to be completed in the near term. The acquisitions in Bestari Jaya (Selangor) and Seberang Perai Selatan (Jawi, Penang) are set to be completed by 4QCY24, while the one in Pulai (Johor) is expected by 1HCY25.

Forecasts. We fine-tune our FY25F earnings by a 2% upward adjustment to reflect better demand for its affordable properties. In addition, we introduce our FY26F numbers with 8% YoY core EPS growth.

Valuations. We adjust our TP upward by 4% to RM4.15 (from RM4.00) as we recalibrate our property valuation based on the latest outstanding GDV guidance (see Page 3), which has been adjusted upwards by RM4.5b (mainly due to its new Cheras project). However, our revised TP continues to value the packaging business at an unchanged 12x FY25F PER, a premium to sector’s average forward PER of 10x to reflect its size and leadership as one of the largest players in the region. There is no ESG- based adjustment to our TP given its 3-star rating as appraised by us (see Page 5).

Investment case. We like SCIENTX for its competitiveness in the global plastic packaging industry thanks to its scale advantage, low-cost structure (especially, when compared to its overseas rivals), and strong foothold in the affordable housing segment, notably in Johor. While we believe its current valuations have fully reflected its fundamentals, the recent share price correction has balanced out the risk-reward for the stock. Hence, we upgrade our call to MARKET PERFORM from UNDERPERFORM.

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 - 25 Sep 2024