Scientex’s 1H19 core net profit within expectations

TheEdge Thu, Mar 21, 2019 10:44am - 5 years View Original


Scientex Bhd
(March 20, RM8.50)
Maintained market perform with an unchanged target price (TP) of RM8.50:
First half 2019 (1HFY19) core net profit of RM126.2 million came in broadly within our (41%) and consensus (38%) estimates on weaker-than-expected property segment margins due to product mix which we expect will normalise in coming quarters, as well as stronger recognitions in 2H19 aided by recent launches. Top line came in at 46%, but earnings before interest and tax (Ebit) was dragged down by weaker-than-expected property segment Ebit margin of 29.8% (versus expectation of 33%, in line with FY18). No dividends, as expected.

 
Year-on-year - year-to date (Y-o-y - ytd), top line was up by 15% from contribution in the manufacturing segment (+22%), aided by contribution from the acquisition of Klang Hock Plastic Industries (KHPI) and the operation in the US, while the property segment revenue declined marginally by 1% due to timing differences of recognition. Group Ebit margins declined by two percentage points (ppts) mainly due to lower property segment contributions as the property segment commands high Ebit margins vis-à-vis the manufacturing segment, while the manufacturing segment margins also declined marginally (-0.5ppt) likely due to a less than favourable product mix. As a result, core net profit (CNP) declined by 10% on the back of a higher effective tax rate (+4ppts). Quarter-on-quarter (q-o-q), top line was up by 7% solely due to the property segment (+58%) which saw higher recognition. As a result, group Ebit improved by 37% on higher contribution from the property segment which commands superior margins versus the manufacturing segment. All in, CNP increased by 40% on slightly lower financing cost (-10%).

Scientex is focused on ramping up utilisation, targeting above 70% over the next few years, mostly from its biaxially oriented polypropylene plant and Arizona plant in the US which will mostly contribute from FY19 onwards. Growth is premised on gradual improvement in utilisation rate for the manufacturing segment, and (ii) full-year contribution from KHPI in FY19. The acquisition for the remaining 57.5% of Daiboci is proceeding and we expect the exercise to be completed by end FY19, and to accrete earnings fully in FY20. Note that we have yet to price in the mandatory general offer for the remaining 57.5% acquisition of Daiboci pending the outcome of Daiboci’s shareholders’ decision that may opt to keep their shares or sell them for either cash or in exchange for Scientex shares. However, we believe the impact on Scientex’s earnings per share (less than 5%) will be fairly neutral either post the dilution of shares or increased financing cost to fund the acquisition.

Maintain financial year ending 2019 to 2020 (FY19-20) CNP of RM309 million-RM349 million as we expect property recognitions and margins to pick up in coming quarters. We are expecting launches of RM1.1 billion-RM1.2 billion in FY19-20, and manufacturing utilisation rates of 65-70% in FY19-20.

Maintain “market perform” and TP of RM8.50 on FY20E valuation to account for the full-year impact to earnings, as well as dilution from the acquisition of 42.5% of Daiboci. Our TP is based on our FY20E sum-of-parts valuation with: (i) unchanged PER of 10 times for the property segment, which is at an 18% discount to small-, mid-cap property players and Johor-exposed peers’ PER due to Scientex’s exposure to the challenging Johor market, and (ii) an unchanged 15.5 times applied PER for the manufacturing segment (a 14% discount compared to SLP’s applied PER given its lower margins of 6-7% vs 15%, but above Thong Guan (nine times PER) given its earnings stability. Maintain “market perform” as we believe we have priced in most foreseeable positives.

Risks to our call include: (i) higher/lower-than-expected resin cost, (ii) stronger/weaker product demand from overseas, (iii) stronger/weaker-than-expected property sales, and (iv) foreign currency risk from a weakening of the ringgit. — Kenanga Research, March 20

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