KUCHING: Scientex Bhd’s (Scientex) near term earnings is poised to ease as the company continues to increase its presence by penetrating new markets and increase its market share across Southeast Asia.
Nonetheless, analysts believe Scientex’s strategy will yield long term benefit for the company in the future.
RHB Research Institute Sdn Bhd (RHB Research) in a report said Scientex’s long term prospects remain strong supported by its expansion strategy to quadruple its consumer packaging capacity by 2017.
It observed that the company had earlier proposed to invest over RM240 million in capital expenditure over the next two years to quadruple the production capacity of its consumer packaging segment to 120,000 tonnes by 2017 from 54,000 tonnes currently.
Following a briefing by Scientex’s managment, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) in a report said Scientex’s forward earnings from the manufacturing segment could be less sanguine as the company continues its market penetration strategy in the second quarter of financial year 2015 (2QFY15) to increase its presence in new Southeast Asia markets.
It observed Scientex’s 1QFY15 net profit dropped by 38 per cent quarter-on-quarter (q-o-q) to RM30.3 million due to the adoption of a market penetration strategy for the consumer packaging polyethylene film.
In the meantime, the research firm observed that Scientex would continue to encounter foreign exchange losses due to the weakening of the ringgit against the US dollar as 77 per cent of the company’s borrowings are denominated in US dollar as at 1QFY15.
Additionally, Kenanga Research is neutral on the prospects of the company’s property division as majority of Scientex’s property projects are located in Johor.
As a result of weak property market sentiment in Johor despite Scientex’s potential new property launches worth RM550 million to RM600 million, Kenanga Research is less optimistic over the earnings growth of the company.
Meanwhile, Kenanga Research believes Scientex’s market penetration strategy may continue to compress its consumer packaging margin, while noting that a prolong drop in resin prices due to the fluctuating crude oil price could negatively impact Scientex’s turnover.
Correspondingly, it observed that the company’s earnings have less pricing power and its stretch film segment prices are highly correlated to resin prices.
Given the scenario of potential lower earnings, the research firm has downgraded the valuation of the company due to weakness in both the property and plastic manufacturing outlooks.
The research arm of TA Securities Holdings Bhd (TA Research) in a another report said with the anticipation of Goods and Services Tax (GST) which will be in force next year, the research firm expects some short-term impact on demand of properties, thus potentially affecting the company’s property sales.
Nevertheless, TA Research expects the company’s property sales to be encouraging as the company’s new development at Kulai II which consists of mixed housing development is expected to contribute to the company’s financial performance in 2QFY15.
On Dec 17, Scientex told Bursa Malaysia that its earnings for 1QFY15 increased by 3.1 per cent year-on-year (y-o-y) to RM30.27 million from RM29.34 million in 1QFY14.
At the same time, the company added its turnover for 1QFY15 grew by 18.2 per cent y-o-y to RM431.07 million from RM364.81 million.
RHB Research noted that the increase for Scientex’s revenue y-o-y in 1QFY15 was attributed to better contribution from the property and consumer packaging segments.