Finally, some optimism
- Scientex Packaging’s FY7/22 core net profit exceeded our full-year forecast on sales ratcheting up beyond expectation and a lower effective tax rate.
- Our FY7/23-24F EPS are lifted 10-18% on higher sales. The stock’s upside lies in better margins since input costs and freight rates are coming down.
- We upgrade Scientex Packaging to Add after rolling over our TP’s valuation basis to CY24F (still pegged to 12x P/E, or 0.5 s.d. below the 10-year mean).
FY7/22 core net profit exceeded expectations
Scientex Packaging (Ayer Keroh) surpassed analysts’ expectations by posting a FY7/22 core net profit of RM43.1m (excluding RM18,000 in asset disposal gains). The FY7/22 core net profit was 6% higher than our full-year forecast and 2% more than Bloomberg consensus’s. The FY7/22 core net profit’s yoy drop was lower than expected, at 8.1% vs. our forecast of 13.8%. Its FY7/22 sales leapt 28.6% yoy, higher than the 16% that we had projected. Its effective tax rate was also lower than our expectation, at only 0.4%, thanks to tax incentives it had received for its investments in new machinery. The group paid out a final DPS of 2.5 sen, bringing the full-year DPS to 5 sen – in line with our expectation.
Some reprieve for margins in 4QFY7/22
Scientex Packaging’s margins in 4QFY7/22 showed marked improvements after over a year of being squeezed by soaring logistics and raw material costs. Resin prices began to cool, pushing the group’s EBITDA margin up from 3QFY7/22’s 8.8% to 9% in 4QFY7/22. While 4QFY7/22 sales came off by 7.5% qoq, improving margins and the tax credit brought Scientex Packaging’s core net profit up by 10.3% qoq in 4QFY7/22.
Raising FY7/23-24F EPS by 10-18%
We expect Scientex Packaging’s sales to sustain its growth momentum in FY7/23-25F as it previously expanded capacity by enough to double its FY7/19 sales. We therefore raise our FY7/23-24F EPS by 10-18% on higher turnover projections. The group should also benefit when its input costs are lower. Since it designs and prints flexible plastic packaging, the group’s margins should expand when it procures plastic products at lower prices. Logistics costs are also starting to fall following the rapid climb in freight rates during the 2020-21 global lockdown.
Upgrade to Add; things are looking up for Scientex Packaging
For the first time in a long time, Scientex Packaging sounded optimistic over its long-term prospects. It said its initiative to design and print sustainable packaging has gained traction among its clients and this should further fuel sales after its record high in FY7/22. We upgrade Scientex Packaging from Hold to Add as we believe the spectre of eroding margins over its bottomline is fading. Our TP rises from RM2.12 to RM2.73 after rolling over our P/E basis year to CY24F. The target multiple is kept at 12x, which is 0.5 s.d. below its 10-year mean of 18.6x. This is to reflect the risks of suppressed sales growth during an economic slowdown. Downside risks: sales bottoming and input costs remaining elevated.
