Review

• Scientex Berhad (SCIENTX)’s FY23 core earnings met expectations after excluding the one-off items, accounting for 103% and 100% of ours and market’s full-year projections, respectively.

• An interim dividend of 5sen/share was proposed for 4QFY23 (4QFY22: 5sen/share), bringing the YTD dividend to 10.0sen/share (FY22: 9.0sen/share).

• YoY: FY23 revenue rose marginally by 2.3%, driven by higher take up rate in property division, partly offset by lower demand in the manufacturing division due to global economic uncertainty and clients’ inventories adjustment. As a result, SCIENTX registered a double-digit core earnings growth of 11.1% in tandem with topline expansion.

• QoQ: 4QFY23 revenue grew 7.5% compared to the preceding quarter, largely underpinned by strong sales growth in the property segment (+24.9% QoQ), offset by lower contribution from the manufacturing division (-2.5% QoQ). Consequently, the core net profit advanced by a larger magnitude of 19.6%, excluding the one-off expense items. Notably, the company incurred a RM22.7mn goodwill impairment loss in regard to its Myanmar operations in the quarter under review to reflect actual value of the assets, which could be due to local political tension and deteriorating economic conditions.

Impact

• We tone up our FY24/25 earnings forecasts by 3.2%/5.1%, respectively, to reflect brighter outlook in its property segment. We also introduce our FY26 projections, expecting little changed in profit.

Outlook

• Manufacturing. Despite the cloudy outlook in the packaging industry, we foresee gradual economic improvement that should help mitigating these issues. However, the subdued demand is expected to persist until 1QFY24 due to inventory adjustments made by customers who previously overstocked to hedge against market risks. Notably, the FY23 segmental OP margin should log at 7.9%, excluding the RM22.7mn goodwill impairment loss. Conversely, SCIENTX may not benefit from reduced resin costs, given its primarily cost-plus and contractual order practice. Nonetheless, we anticipate the OP margin recovery through accelerated solar facility adoption at manufacturing sites and automated production to bring down labour and utility costs.

• Property. We expect its property segment will remain robust on the back of stabilised OPR hikes and inflationary tension. Recap, the take up rate for FY23 stood at c.85% following new GDV launch amounting up to RM2.1bn. In FY24, the company is set to launch affordable housing projects of c.RM2.6bn GDV amidst expanding its landbank with CAPEX allocation of c.RM1bn.

Valuation

• We adjusted our TP to RM3.95/share (previously RM3.77/share) based on sum-of-parts valuation, in line with our forecast adjustment. Given that the CY24 total return of 10.7% is below our RRR+5% threshold, we downgrade Scientex to Hold.

Source: TA Research - 21 Sept 2023