• Still BUY, new MYR3.80 TP from MYR3.91, 11% upside and c.3% yield. Scientex reported 3QFY23 (Jul) results that were broadly in line with expectations. It booked double-digit YoY earnings growth driven by robust demand for its affordable housing offerings that offset the decline in packaging sales. We continue to like this stock for its attractive valuation and solid long-term prospects, backed by a steady demand for affordable homes and leading position in the plastic packaging segment.

• Results review. 3QFY23 net profit rose 26.6% YoY (+3.4% QoQ) to MYR109.7m, bringing 9MFY23 core earnings to MYR323.1m (+14.1% YoY). This is broadly in line with expectations at 71% and 70% of our and Street’s full-year estimates. Contributions from the packaging segment continues to slide sequentially amidst softer global demand and higher energy costs, but this was offset by the improving property segment. Consequently, 9MFY23 EBIT margins improved to 14.7% (9MFY22: 13.2%). Scientex also declared a dividend of 5 sen/share (3QFY22: 4 sen).

• Packaging wing continues to slip. 3QFY23 packaging revenue declined 3% QoQ (-15.2% YoY) while operating profit fell 23.8% QoQ (-22% YoY) due to the full quarter impact of the higher electricity tariff – this led to a lower EBIT margin of just 7% (2QFY23: 8.9%, 3QFY22: 7.6%). While global demand for packaging products is set to stay soft in the near term, we believe this will be partially cushioned by robust sales from the consumer packaging sub-segment. At the same time, Scientex continues to innovate with new sustainably produced products that we think are likely to drive future topline growth.

• Robust demand in the property segment. 3QFY22 revenue increased 11.9% QoQ (+48.1% YoY) amid higher progress billings from on-going projects and robust demand from new launches. This was also aided by speedier authority approvals and processes, which had delayed revenue recognition in the past. We are optimistic that Scientex is on track to achieve its property launch target of MYR2bn for FY23, as demand for affordable homes should remain healthy – this is reflected in the 80% take-up rate for its new launches. Hence, we continue to expect the property segment to be the main earnings driver in the near term.

• Maintain BUY with new MYR3.80 TP. We make minimal adjustments to our earnings forecast as results were in line, but lower our ESG premium to 0% from 4% after tweaking our ESG weightage, given the greater emphasis on the E pillar. Scientex’s valuation remains attractive, with the stock trading at -0.5SD from its historical P/E mean. Downside risks to our call are higher- than-expected costs, weaker products demand, and softer property sales.

Source: RHB Research - 21 Jun 2023