• Keep BUY, with new TP of MYR3.91 from MYR3.95, 11% upside and c.3% yield. Scientex reported 2QFY22 (Jul) results, which were below our and consensus expectations mainly due to lower-than-expected sales from the packaging segment. Regardless, we continue to like this stock for its attractive valuation and solid long-term prospects, backed by a steady demand for affordable housing and its leading position in the plastic packaging segment. This report marks the transfer of coverage to Syahril Hanafiah.

• Slightly below expectations. 2QFY23 net profit rose 13% YoY to MYR106.2m, bringing 1HFY23 core earnings to MYR213.3m (+8.6% YoY). This came slightly below our and consensus estimates, at 45% and 44%. The main deviation mainly came from lower-than-expected sales from the packaging segment. However, 1HFY23 EBIT margins improved to 14.5% (1HFY22: 13.8%) on higher contributions from the property unit.

• Packaging segment’s operating profit rose 9% YoY in 2QFY23 despite a 5% YoY decline in revenue. This was mainly due to a better product mix during the period with more consumer packaging products (of higher margins) being sold relative to industrial products. As a result, the packaging segment’s operating margin improved to 8.9% in 2QFY23 from 7.7% in 2QFY22. However, its 1HFY23 operating profit dropped 3% YoY due to higher operating costs and weakening industrial packaging sales.

• Property segment’s 1HFY23 operating profit rose 25% YoY, as the main bottleneck – authority approval process – has improved and expedited during the period. This is coupled with strong take-up rates for the new launches. Meanwhile, the constructional progress on its ongoing projects has been steady. In 1HFY23, a total of MYR1.15bn of properties were launched with a take-up rate of 70% – a stark improvement from MYR410m of properties launched in 1HFY22.

• Outlook. In the coming quarters, we may see the packaging segment’s revenue growth being dragged mainly by the industrial packaging segment in light of waning global demand, while consumer plastic packaging sales is expected to remain robust. On the property side, we are optimistic that Scientex is on track to achieve its property launch target of MYR2bn for FY23. Hence, we continue to expect the property segment to be the main earnings contributor in the coming quarters.

• Maintain BUY with new MYR3.91 TP after cutting our FY23F-24F earnings by 0.3-4.8% as we lower packaging utilisation rates. This is in view of the slower industrial packaging demand and increase in the property segment’s revenue in light of the improved construction progress. Regardless, valuation remains attractive, with the stock trading at -0.5SD 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.

Source: RHB Research - 16 Mar 2023