• Upgrade to BUY from Neutral, with TP of MYR4.68 from MYR4.90, 19% upside and c.3% yield. Despite the commendable topline growth, Scientex reported 2QFY22 (Jul) results that were below our and consensus expectations due to elevated costs of raw materials and freight which impacted earnings. In the midst of the tough operating landscape, its risk- reward profile has managed to turned favourable following a c.20% de- rating in recent weeks. The stock is now trading at -1SD from its mean.

• Missed expectations. Scientex reported 2QFY22 net profit of MYR93.7m (-9% QoQ, -17% YoY), bringing 1HFY22 core earnings to MYR196.6m (-4% YoY). This came below our and consensus estimates at 43% and 39%. EBIT margin narrowed to 13.2% in the quarter (16.5% in 2Q21) due to elevated costs of raw materials and freight, which were further impacted by the ongoing Russo-Ukrainian war.

• Results review. 2QFY22 revenue improved 2.6% QoQ to MYR952m (1HFY22 revenue +10% YoY) due to a firm demand for industrial and consumer packaging, with exports packaging revenue growing 17.5% YoY in 1HFY22 (locally: +7.2% YoY). Revenue from the property segment remained flat in 1HFY22 (+0.6% YoY) due to a postponement of the issuance of the certificate of completion and compliance (CCC) for certain property projects which delayed the progress billings for the period.

• New stretch film plant coming online in the second half of this year. Scientex’s new robotics stretch film plant – the first of its kind in Asia – will commence operations in a few months (capex: MYR80m). The plant will initially be installed with two fully automated production lines which should improve the group’s manufacturing efficiency, productivity, and add an industrial stretch film capacity of 1,500 tonnes/month.

• Lower property launch target of MYR1.7bn. Management targets to launch MYR1.7bn properties in FY22F, an amount that is lower compared to its previous target of MYR2.0bn (FY21: MYR1.5bn). This is due to timing differences from the aforementioned CCC issuance deferment, which delays property launches. Despite the setback, we still expect an improved performance from this segment. In 1HFY22, a total of MYR410m of properties were launched in Penang, Melaka, and Johor, with the group targeting 24 more launches in 2HFY22.

• We adjust our FY22F-24F earnings by -10%, -8%, and -3% to account for the high raw material prices that should remain elevated for the year, and the lower property launch target. We derive an SOP-based TP of MYR4.68 and incorporate a 2% ESG premium in our valuation based on our in-house methodology.

Source: RHB Research - 17 Mar 2022