SCIENTX’s 1QFY24 results met expectations. Its 1QFY24 core net profit jumped 23% YoY driven by robust sales and deliveries of affordable homes, partially offset by weak packaging profits. A similar trend is likely to persist over the immediate term. We maintain our forecasts but raise our TP by 16% to RM3.75 (from RM3.23) to reflect a property valuation re-rating. Upgrade to MARKET PERFORM from UNDERPERFORM.

Within expectations. Its 1QFY24 core net profit of 137.4m met expectations, coming in at 25% and 26% of our full-year forecast and the full-year consensus estimate respectively.

YoY, its 1QFY24 revenue rose 7%, mainly driven by improved performance of its property segment (+45% YoY). The higher property turnover was fuelled by: (i) strong progress billings, and (ii) a strong take-up for its new launches in Scientex Sungai Dua, Scientex Seremban and Scientex Bandar Jasin. This was partially offset by a 9% decline in packaging turnover due to weaker exports.

Its core net profit surged by a sharper 23% thanks to improved property development margins due to better cost absorption on higher sales coupled with savings from bulk purchasing of construction materials, partially offset by lower packaging margins on weak product prices.

QoQ, its 1QFY24 turnover improved 3% showing marginal growth in both its packaging segment (+5% QoQ) and property segment (+1% QoQ). Its bottom line was flattish.

Outlook. We anticipate softer growth in the short term for its packaging segment, dragged down largely by consumer packaging (vs. industrial packaging) amidst a slowing global economy. However, this is partially mitigated by the robust demand for its new affordable housing launches with a strong take-up rate of over 80%. The acquisitions of land in Jenjarom, Selangor, as well as Kulai and Tebrau, Johor, are expected to be completed by mid-2024, which will sustain its project pipeline.

Forecasts. Maintained.

Valuations. However, we raise our SoP-TP by 16% to RM3.75 (from RM3.23) to reflect: (i) a lower discount to its property RNAV of 50% (from 60%) as we now apply a lower discount to RNAV for affordable housing developers given the robust demand in the segment, and (ii) enhancement from new land parcels in Jenjarom (Selangor), Tebrau (Johor) and Kulai (Johor). We maintain our valuation basis of 12x FY24F PER for its packaging business, at a premium to sector’s average forward PER of 10x to reflect its size, being one of the largest players in the region. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like SCIENTX for: (i) its competitiveness in the global plastic packaging industry given its size and low cost structure (especially, as compared with its overseas rivals), and (ii) its strong foothold in the affordable housing segment in Johor. However, its plastic packaging business is likely to remain in the doldrums over the near term on the back of the slowdown in the global economy. Nonetheless, we upgrade our call to MARKET PERFORM from UNDERPERFORM given the re-rating of its property valuation as mentioned.

Risks to our call include: (i) a sudden spike in resin prices, (ii) weak consumer demand for packaging materials due to prolonged global economic downturn, and (iii) high inflation, elevated mortgage rates and a weak job market, hurting demand for its properties.

Source: Kenanga Research - 15 Dec 2023