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Scientex to improve in coming quarter, says Affin Hwang

KUALA LUMPUR (Dec 18): Affin Hwang Capital Research has maintained its "buy" call on Scientex Bhd at RM9.53 with an unchanged target price of RM10.50, and said Scientex's first quarter of financial year 2020 (1QFY20) core net profit growth of 45% was within market and its expectations.

In a note today, the research house said it expects stronger property billings and higher production volumes in the coming quarter.

For the manufacturing segment, it said Scientex is currently focused on ramping up its utilisation rate, with a target to achieve at least 70% in FY20 earnings (FY20E) (versus 1QFY20: 65%), driven by its biaxially oriented polypropylene plant and Arizona plants, and through higher process automation at its plants.

"We also learnt that Scientex has made further inroads into the US market, via the acquisition of stretch film plants in Lancaster, South Carolina State, Eastern USA (no machines installed yet)," it added.

Meanwhile, for the property segment, the research house said Scientex is acquiring 108.5 acres of freehold land in Seremban, Negeri Sembilan, for RM66.2 million, and 85.7 acres of freehold land in Kota Tinggi, Johor, for RM39.2 million.

"We are positive on Scientex's first foray into Negeri Sembilan with the Seremban land acquisition, given the land is near most hypermarkets and is easily accessible by the North-South expressway.

"The acquisition price for the Seremban land based on RM14 per square foot (psf) looks fair, similar to the recent land transaction median price of RM14 psf in Taman Bukit Galena," it said.

As for the Kota Tinggi land buy, Affin Hwang Capital Research said the acquisition price for the land is based on RM10 psf, which is lower than the median price transaction of RM12 psf in Kota Tinggi. The acquisitions will be funded by internally generated funds and bank borrowings.

Both lands are slated for a mixed development project, but further details such as total gross development value (GDV), development cost, commencement and completion dates are still at its infancy stage.

After the acquisitions, Scientex's landbank will increase to 3,990 acres, which will help to realise its Vision 2028 to deliver 50,000 affordable homes by 2028 (currently 18,500 units), said the research house.

Furthermore, Scientex yesterday reported its 1QFY20 core net profit, which rose 45% year-on-year (y-o-y) to RM83 million on higher revenue (+23% y-o-y) and higher earnings before interest, taxes, depreciation and amortisation (Ebitda) margin due to higher manufacturing margins with cheaper resin costs and better production efficiency.

"Notably, manufacturing segment earnings before interest and tax (Ebit) rose by 55% y-o-y to RM55 million, driven by continued demand from export (+9% y-o-y) and domestic markets (also partly lifted by subsidiary Daibochi's contribution).

"Elsewhere, the property segment's Ebit expanded by 58% to RM63 million from the steady progress billing recognised for its development projects," it said.

The research house also said Scientex's 1QFY20 core net profit fell 38% quarter-on-quarter (q-o-q) due to the high base seen in 4QFY19.

"With a sequential decline in 1QFY20's progress billing, we saw the property division's Ebit pulling back by 44% q-o-q to RM63 million.

"With 1Q being a seasonally weaker quarter, we are expecting upcoming quarters to see some improvement in property numbers, underpinned by current unbilled sales of RM700 million and the target GDV of RM1.1 billion," it added.

At 10.08am, Scientex shares added 0.21% or 2 sen to RM9.55, for a market capitalisation of RM4.92 billion.

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