MIDF Research has recommended a “buy” on Scientex stock with an unchanged target price (TP) of RM2.83.
PETALING JAYA: The overall prospects of Scientex Packaging (Ayer Keroh) Bhd
(SciPack) looks good, given the robust demand for sustainable packaging, especially in the food and beverage and fast-moving consumer goods (FMCG) sectors.
For that reason, MIDF Research has recommended a “buy” on the stock with an unchanged target price (TP) of RM2.83.
However, SciPack is expected to wrestle with elevated plastic resin prices and freight costs, which may continue to hurt the group’s profit margins, the research house said in its latest report.
Another downside risk would be the prolonged political instability in Myanmar, which may cause the group to face operational challenges, it added.
MIDF Research also made no changes to its forward earnings estimates on SciPack as the group’s latest core profit after tax and minority interests of RM31.8mil for the nine months of financial year 2022 (9M22) came in within expectations.
“This makes up 73% and 76% of ours and consensus full-year estimates,” said MIDF Research.
In the nine-month period, SciPack posted higher revenue of RM582.2mil due to stronger flows of orders as its clients had fully resumed their operations.
Exports contributed 47% to the group’s total revenue compared to 44% in 9M21.
Meanwhile, CGS-CIMB Research has downgraded SciPack to a “hold” call with a lower TP of RM2.12 on margin compression risks.
“We are of the view that SciPack would continue to wrestle with margin compression woes in the foreseeable future given the current economic backdrop.”
SciPack does not have the luxury of constantly revising its selling prices unlike plastic product and stretch film manufacturers, “as they have locked into a longer contract with the consumer-goods players,” the research house said in its report.
“As a flexible packaging converter, SciPack is contracted to FMCG or pharmaceutical brands to put together plain plastic products with labels and packaging designs into final products seen on retail store shelves,” explained CGS-CIMB Research.
It said: “The counter’s tight liquidity may also make for lacklustre trading in the absence of catalysts.”
The downside risks for SciPack include raw material and logistics prices spiking further.
CGS-CIMB Research noted that SciPack’s 9M22 core net profit was above both its and consensus expectations due to better-than-expected sales.
“However, we expect higher effective tax rates and continuing cost increases to result in weaker margins in FY23 to FY24,” it said.
Thus, the research house has cut SciPack’s FY23 to FY24 earnings per share estimates by 3% to 9% on higher tax rate and input costs.
