Scientex’s profit slightly below expectations

by **Cals** Tue 25 Mar 2014, 00:40

Business & Markets 2014

Written by Kenanga Research

Monday, 24 March 2014 10:04

Scientex Bhd
(March 21, RM5.80)
Maintain outperform with target price of RM6.69: Scientex’s net profit for the second quarter of financial year 2014 ending July of RM33.9million (+15.6% quarter-on-quarter [q-o-q], +32.5% year-on-year [y-o-y]), brings its first half (1H) net profit to RM63.3 million (+25.3% y-o-y).
This is slightly below expectations at 40.8% of our full-year estimates and 41.7% of the consensus numbers. The key culprits are: (i) higher raw material costs which affected margins for the manufacturing segment and (ii) overly aggressive estimates for property launches. No dividends were declared for the quarter, as expected.
Scientex registered a q-o-q top line growth of 5.1% while net profit increased by 15.6%.
Revenue from the manufacturing segment was flat (-0.3% q-o-q) with higher resin prices and the electricity tariff hike leading to a 9.9% q-o-q decline in earnings before interest and tax (Ebit).
Nevertheless, the property segment was more than able to offset the weaker performance from the manufacturing segment, with 25.7% revenue growth and 32.1% increase in Ebit. Scientex’s 2QFY14 group revenue rose by 41.5% y-o-y, driven by the manufacturing segment (+49.1%) and the property segment (+22.5%).
For the manufacturing segment, the increase in revenue was underpinned by higher demand for stretch film products in the Asia-Pacific region as well as full-quarter contributions from consumer packaging products.
At the same time, the group’s property division benefited from positive responses for new launches and higher progress billings from existing projects. Given the larger contribution from the lower margin manufacturing segment, overall net profit increased by a lower 32.5% y-o-y. Year-to-date, 1HFY14 revenue enjoyed a decent growth of 46% with increases from both the manufacturing (+57.8% y-o-y) and property segments (16.4% y-o-y).

[You must be registered and logged in to see this image.]

In addition to the higher stretch film sales, the manufacturing segment benefited from a full six-month contribution from the newly acquired consumer packaging subsidiary compared with just one month’s contribution in 1HFY13 (January 2013). Meanwhile, revenue growth from the property segment was attributed to resilient demand in Iskandar Malaysia, Johor, and Melaka as a result of its strategic location and affordable selling prices. In line with the better top line performance, 1HFY14 net profit rose by 25.3%.
While the rise in raw material prices affected margins for the manufacturing segment, we remain positive on Scientex’s longer-term prospects. Ongoing expansion plans for higher margin consumer packaging films and product extensions such as the thinner gauge film (6 microns) should provide added buffers against margin contractions.
At the same time, the group has also recently completed the expansion of its stretch film capacity to 194,000 tonnes per year (December 2013), which would provide the impetus for growth in manufacturing revenue and accelerate the prospects of spinning off the group’s property division — a potential rerating catalyst for the stock
We are trimming our FY14 earnings forecasts to RM145.5 million (-6.1%) and for FY15E to RM170.4 million (-6.8%), after reducing our gross margin assumptions for the manufacturing segment, and also by assuming less aggressive property launches.
Despite the slightly lower earnings forecasts, we are raising our sum-of-parts-based target price to RM6.69 (from RM6.28) after rolling over our manufacturing segment valuation base year to FY15. — Kenanga Research, March 21
This article first appeared in The Edge Financial Daily, on March 24, 2014.