Scientex’s 1QFY16 core net profit comes above expectations

Scientex Bhd (Dec 18, RM9.50)

Maintain buy with a higher target price (TP) of RM10.54: Scientex’s first quarter ended Oct 31, 2015 (1QFY16) core net profit improved by 101.1% year-on-year (y-o-y) to RM60.9 million, underpinned by strong sales contributions from its manufacturing and property segments. The results came above our (33%) and the consensus estimates (33%). No dividend was declared for the quarter under review. 

Revenue expanded by 27.7% y-o-y to RM550.6 million owing to both manufacturing (+22.4% y-o-y to RM392 million) and property (43.2% y-o-y to RM158.6 million) segments. The sterling results of the manufacturing segment were attributable to higher contributions from both its industrial and consumer packaging divisions.

The consumer packaging segment’s revenue rose by 44.8% y-o-y to RM184.1 million. The segment benefited from the additional capacity from the newly acquired subsidiary, Scientex Great Wall Sdn Bhd in Ipoh, and enlarged client base.

Meanwhile, the growth in the property segment was largely driven by strong sales from The Garden Residences in Taman Mutiara, Skudai, Johor in addition to stable demand for other developments in Pasir Gudang, Kulai, Senai and Melaka.

The group launched six new projects worth RM15.4 million in the quarter. In line with the strong sales, the group’s operating profit jumped significantly by 97.8% y-o-y to RM82.1 million. Growth was mainly driven by the manufacturing segment, which saw a stunning rise in operating profit to RM38 million (+158.5% y-o-y) due to the improved margin by 5.1 percentage points (ppts).

Operating profit from the property segment also climbed by 48.4% to RM47.5 million. However, the operating margin merely improved by 1.1ppts. Sequentially, the group’s profit before tax grew by 4.9% quarter-on-quarter to RM80.8 million due to better margins of the manufacturing segment.

We revised our average blended operating margin assumption for the manufacturing segment by 1.9ppts/1ppt for FY16 and FY17 to account for better-than-expected operating margins from the consumer packaging segment. As a result, FY16 and FY17 earnings forecasts have been upgraded by 12.7% and 7.5% respectively.

We remain bullish on the manufacturing business on the back of capacity expansion in the high-margin consumer packaging business. Furthermore, its brand-new cast polypropylene and biaxially oriented polypropylene film manufacturing plants are on track for commissioning and commercial operations by end-2015 and mid-2016 respectively. 

As for the property development segment, we expect to see encouraging sales in Senai, Johor. The group will be relying on its affordable home division (landed housing below RM500,000), where demand remains resilient. Unbilled sales increased to RM632.2 million, to be recognised over two to three years, versus RM584.9 million in FY15. 

The group will also be focusing on improving efficiencies by reducing costs and wastage. This could be achieved through better planning and systematic execution of works, coupled with better cash flow management to lower financing costs. 

We upgrade our TP to RM10.54 (RM9.01 previously). The TP was derived based on a sum-of-parts valuation methodology, and assigning price-earnings ratios (PERs) of 17 times and six times for the manufacturing and property segments respectively. We maintain our “buy” call on the stock, underpinned by its strong earnings growth in FY16 and FY17, an attractive dividend yield of 3% and undemanding valuations (9.2 times to 10 times forward PER). — TA Securities, Dec 18

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