PETALING JAYA: The rise in raw material costs are putting pressure on profit margins of plastic products manufacturers like Scientex Bhd. But analysts say that Scientex is likely to benefit from demand recovery and easing supply chain disruptions with the full reopening of economies in many countries.

       Meanwhile, the group’s property segment is also expected to deliver better progress billing and property launches as construction activities largely resume, according to UOB Kay Hian (UOBKH), which is forecasting a 7.6% to 8.8% revenue growth for Scientex in the financial years 2022-2023 (FY22 to FY23).

       But the research firm said that input inflations are likely to continue to compress its earnings spreads and margins throughout FY22 to FY23.

       “For the manufacturing segment, we expect high resin prices, which have surged more than 10% year-to-date to sustain throughout FY22 to FY23 and negatively affect the segment’s margin as the group usually has a time lag to pass through the cost.

       For the property segment, steep increases in building material prices such as cement and steel are also expected to put downward pressure on the segment’s profitability margin,” UOBKH said in a report yesterday.

       For the third quarter ended April 30, 2022 (3Q22), Scientex’s net profit came in minus 12.3% lower year-on-year to RM99.1mil despite registering a record-high revenue.

       Analysts said the lower profitability reflected the manufacturing division’s margin compression due to input inflations.

       Its property segment’s earnings also took a toll due to material shortages and changes in certain regulatory application processes.

       It announced an interim dividend of four sen, implying a dividend yield of 1.1%, according to UOBKH.

       The research firm said the stock’s current valuations remain reasonable for solid long-term prospects. It noted that Scientex’s share price has retraced about 31% from the recent peak.

       “We deem that current valuations are fair and possess about 13% upside based on our forecasted FY23 valuations.

       “We also envision that managements’ effective execution, proven by the group’s stellar track record (with a net profit compound annual growth rate of 14% for the 2016 to 2021 period) will provide confidence for investors looking beyond the temporary cost headwinds, which will gradually moderate,” said the research firm.

       UOBKH is maintaining a “hold” call on the stock with a lower target price of RM3.92, from RM4.39 before.

       Meanwhile, RHB Research said sales of plastic products should continue to improve, with the group’s new stretch film plant, which is expected to be commissioned in the second half of 2022. The research firm said despite the near-term headwinds, it continues to like the stock for its encouraging growth prospects, backed by the steady demand for plastic packaging and affordable housing.

       “We adjust FY22 to FY24 forecast earnings by minus 10% to 2% to account for the deferment of property sales.

       “We also lower our ascribed price to earnings (PE) for the manufacturing segment from 16 times to 14 times to reflect the more cautious market sentiment,” said RHB Research.

       That said it also feels valuations are attractive versus its historical PE average. RHB Research maintains a “buy” call on the stock with a new target price of RM4.12 from RM4.68 previously.