• Keep NEUTRAL and MYR4.25 TP, 6% downside. Scientex reported 1QFY25 (Jul) results which were below expectations, mainly due to weaker-than-expected contributions from the packaging segment. Despite expecting a slightly better outlook for packaging as well as greater contribution from the property segment in FY25, we think the stock is fairly valued as it is now trading at 11.5x FY25F P/E, in line with its historical mean.
• Missed expectations. 1QFY25 net profit of MYR128.9m (-7.0% QoQ, -6.7% YoY) came in below expectations, at 21% of our and Street full-year estimates, mainly due to lower-than-expected contribution from the packaging segment. Contribution from the packaging segment continues to remain weak amidst softer global demand, partially offset by the improving property segment. Consequently, 1QFY25 EBIT margin declined to 15.9% (FY24: 16.5%).
• Results review. 1QFY25 revenue slipped saw a 0.3% YoY uptick (-5% QoQ) on the back of stronger contributions from property development segment, offset by the packaging segment, mainly from the export market due to strengthening of the MYR during the period, on top of unfavourable sales mix. Consequently, while packaging revenue declined 4% YoY, operating profit fell by a higher 39% YoY due to lower margin. On the property side, revenue and operating profit rose 6.0% and 5.7% YoY thanks to the higher construction progress on top of strong take-up from new launches.
• Outlook. We think Scientex's earnings will likely pick up in the coming quarters despite a weak start, as it has started seeing returning demand for consumer packaging as customers continue to replenish their inventory, while the weakening of the MYR in recent months should favour its export market. Furthermore, the group is well placed to provide sustainable packaging solutions, which we think will likely be the driver for its future topline. Scientex's property segment continues to remain robust - driven by strong demand for its affordable housing offerings.
• We cut our FY25F earnings by 3% after lowering our margin assumption for the packaging segment to 7.6% (from 8.3%). We make no changes to our FY26F-27F earnings.
• Maintain NEUTRAL with an unchanged TP of MYR4.25 after rolling forward our valuation to CY25F earnings for the packaging segment. Our TP is derived after taking into account a 0% ESG premium/discount as its ESG score is 3.0. Scientex's valuation is now fair, trading at its historical P/E mean. Key risks to our call include operating costs fluctuations, as well as changes in demand for packaging products and property sales.

Source: RHB Securities Research - 19 Dec 2024