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Maintain BUY, with lower SOP-based MYR3.95 TP from MYR4.31, 16% upside and c.3% yield. Scientex recorded 1QFY23 (Jul) results that were below expectations, with the packaging segment reporting lower sales as customers turn more cautious amid growing market uncertainty. That said, we continue to like the stock for its attractive valuation. The group’s long- term prospects remain solid, backed by steady demand for affordable housing and Scientex’s leading position in the plastic packaging segment.
Slightly below expectations. 1QFY23 net profit of MYR107.2m (-14% QoQ, +4.2% YoY) was below expectations at 22% of our and consensus’ full-year estimates. Despite lower raw material prices, EBIT margin dropped slightly to 13.9% (1Q22: 14.4%) due to lower sales from the packaging division and higher utility costs.
Results review. 1Q23 revenue improved 11% YoY (-7.3% QoQ) on the back of contributions from its consumer packaging products and property development projects. However, the industrial packaging products segment saw lower sales as customers turn more cautious about global trade sentiments. Operating costs were also higher due to higher utility costs and depreciation costs from the ongoing capacity expansion. As a result, while packaging revenue increased 5.6% YoY, operating profit fell 12.1% YoY from lower margins. On the property side, revenue and operating profit rose 25.5% and 26.3% YoY. The higher revenue was mainly from the development projects in Johor and Melaka, as well as strong demand from the group’s new launches.
Outlook. Having missed its original FY22 target to launch MYR2bn in GDV due to deferred government approvals, we think Scientex should be able to exceed the MYR1.2bn launched last year, once the external issues are resolved. On the packaging side, while resin prices fell by -17% QoQ (-11% YoY), management’s tone turned more cautious as the demand for packaging products has declined. With the group’s expansion plans remaining on track, we think utilisation rates could be hampered in the short term if demand remains low.
We lower our FY23F-25F earnings by 6-9% as we adjust our packaging utilisation rates assumption to be more cautious, in view of the slower demand. While we are cautious on the outlook, valuation is still attractive, with the stock trading at -1SD from its historical P/E mean. Our TP incorporates a 4% 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.
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