• Maintain BUY, with new TP of MYR4.12 from MYR4.68, 19% upside and c.3% yield. Scientex reported 3QFY22 (Jul) results that fell below our and consensus expectations, due to lower property sales from a deferment of Certificate of Completion & Compliance (CCC), as well as the sharp rise in raw material costs during the quarter. Despite the near-term headwinds, we continue to like the stock for its encouraging growth prospects, backed by the steady demand for plastic packaging and affordable housing.

• Missed expectations. 3QFY22 net profit of MYR86.7m (-7.4% QoQ, -21% YoY) brought 9MFY22 core earnings to MYR283.2m (-9.9% YoY). This came below our and consensus expectations, at 67% and 65% of full-year projections. EBIT margin shrank to 12.2% (15.2% in 3Q21) following the sharp rise in raw material prices in the quarter following the Russia-Ukraine war, and elevated freight costs impacting the consumer packaging products. It declared a dividend of 4 sen/share for the quarter.

• Results review. 3QFY22 revenue improved by 4.4% QoQ to MYR993.8m (9MFY22 revenue +7% YoY), marking the group’s highest quarterly revenue to date. This was contributed by the packaging segment, which saw an increase in sales in its export markets as well as a rise in ASP. However, the property unit’s revenue plunged 20% YoY to MYR244.2m, mainly attributed to the deferment of CCC for projects in Johor and Melaka due to a shortage of materials for the installation of power supply infrastructure.

• Outlook. Resin prices rose 9% QoQ (+16% YTD) following the surge in crude oil prices. This resulted in lower margins for the consumer packaging products, which faced a longer time lag in its contractual cost pass-through mechanism, compared to a shorter timeline for industrial packaging. With that said, we think margins could improve, as the raw material prices have remained largely stable in recent months while Scientex passes on the cost to customers. Sales should continue to improve, with the group’s new stretch film plant – which is expected to be commissioned in 2H22. For the property segment, there is limited guidance on the CCC deferment as this is not under Scientex’s purview, but the group will look to reviewing the prices of its products due to the rise in material costs.

• We adjust FY22F-24F earnings by -10 to 2% to account for the deferment of property sales. We also lower our ascribed P/E for the manufacturing segment from 16x to 14x, to reflect the more cautious market sentiment. Valuation is still attractive – the stock is trading at -1.5SD from its historical P/E mean. Our TP incorporates a 2% ESG premium, based on our in-house methodology. Downside risks to our call are higher-than-expected costs, weaker product demand, and softer property sales.

Source: RHB Research - 14 Jun 2022