Scientex recorded 1QFY23 (ended in July) results that were below expectations, with the packaging segment reporting lower sales as customers turn more cautious amid growing market uncertainty. That said, RHB Reseach has stated its optimism on this stock for its attractive valuation.
The group’s long-term prospects remain solid, backed by steady demand for affordable housing and Scientex’s leading position in the plastic packaging segment.
Slightly below expectations. 1QFY23 net profit of MYR107.2m (declined 14% QoQ, increased 4.2% YoY) was below expectations at 22% of the street’s full-year estimates. Despite lower raw material prices, EBIT margin dropped slightly to 13.9% (1Q22: 14.4%) due to lower sales from the packaging division and higher utility costs.
Results review. 1Q23 revenue improved 11% YoY (but declined 7.3% QoQ) on the back of contributions from its consumer packaging products and property development projects. However, the industrial packaging products segment saw lower sales as customers turn more cautious about global trade sentiments.
Operating costs were also higher due to higher utility costs and depreciation costs from the ongoing capacity expansion. As a result, while packaging revenue increased 5.6% YoY, operating profit fell 12.1% YoY from lower margins.
On the property side, revenue and operating profit rose 25.5% and 26.3% YoY. The higher revenue was mainly from the development projects in Johor and Melaka, as well as strong demand from the group’s new launches.
Outlook. Having missed its original FY22 target to launch MYR2 billion in GDV due to deferred government approvals, the research house holds the view that Scientex should be able to exceed the MYR1.2 billion launched last year, once the external issues are resolved.
On the packaging side, while resin prices fell by -17% QoQ (-11% YoY), management’s tone turned more cautious as the demand for packaging products has declined. With the group’s expansion plans remaining on track, utilisation rates might be hampered in the short term if demand remains low.
Hence, RHB Research has lowered its FY23F-25F earnings by 6-9% as it adjusts its packaging utilisation rates assumption to be more cautious, in view of the slower demand.
While the research house is cautious on the outlook, valuation is still attractive, with the stock trading at -1SD from its historical P/E mean. Its target price (TP) incorporates a 4% ESG premium, based on its in-house methodology.
Downside risks indentified include higher-than-expected costs, weaker product demand, and softer property sales.
