Scientex Berhad - Land Banking in Melaka

Date: 14/08/2020

Source  :  KENANGA
Stock  :  SCIENTX       Price Target  :  9.70      |      Price Call  :  HOLD
        Last Price  :  11.90      |      Upside/Downside  :  -2.20 (18.49%)

SCIENTX is acquiring 1,357ac of freehold land in Jasin, Melaka for RM260.2m to be financed via internal funds. The lands are targeted for mixed development, with minimal project details, pending finalisation. We are long-term positive on the land acquisition as the pricing appears attractive while its close proximity to SCIENTX’s existing land bank offers economies of scale. It will also support its 2028 affordable housing target. Maintain FY20-21E CNP. Maintain MP on an unchanged TP of RM9.70.

Acquiring land in Jasin, Melaka for RM260.2m. SCIENTX has proposed to acquire two pieces of freehold land from IOI Corporation Berhad and GLM Emerald Industrial Park (Jasin) Sdn Bhd measuring 1,357ac for RM260.2m. The land is slated for mixed property development, but further details such as total GDV, development cost, commencement and completion dates are too preliminary to ascertain. The land is located 5km from Jasin town and is easily accessible from North South Expressway. The acquisition will be satisfied by internal funds or borrowings and is expected to be completed by 1HCY21 and as such will only contribute from FY22 or later depending on launch timeline.

Long-term positive on the acquisition. We were not surprised as SCIENTX does capitalize on attractive land banking from time to time, but we are fairly positive on the implied pricing of the land of RM4.40psf which appears attractive vs. its other land transactions in Melaka which ranged from RM7.5psf to RM11.0psf. However, we do note that land cost could increase on conversion premiums and re zoning. Pending project details from management, land cost to GDV may change subject to the residential to commercial mix and its pricing strategies. We are long-term positive on this acquisition given the fairly attractive pricing, in line with the Group’s objective of completing 50,000 affordable homes throughout the nation by 2028 and the land is also near SCIENTX’s existing land bank in Melaka, allowing the group to capitalize on economies of scale from project implementation.

Outlook. The Group is targeting affordable project launches going forward, with sales target of RM1.0-1.3b in FY20-21, while unbilled sales of RM730m provides less than one year’s visibility. Its manufacturing segment is focused on ramping up utilisation, targeting c.75% over the next few years (vs. c.60% currently), mostly from its BOPP plant and Arizona plant in the United States

No changes to FY20-21E of RM350-442.9m as we do not expect any earnings impact in FY20-21 while the FY21 borrowing cost is negligible at this juncture. However, we expect gearing to increase to 0.39x in FY21 (from 0.33x). FY20-21E dividend of 19.7-24.8 sen is based on pay-out ratio of 30%, implying yield of 2.1-2.7%.

Maintain MARKET PERFORM on an unchanged TP of RM9.70. Our TP is based on our FY21E SoP valuation with: (i) 10x PER for the Property segment, which is on par with mid-cap and Johor-based peers, and (ii) an unchanged 15x applied PER for the manufacturing segment which is at a premium to its industrial peer TGUAN (10x PER) given its stronger margin of 10% (vs. 7%) and SCIENTX’s position as the largest plastic packager under our coverage, allowing it better economies of scale. We believe our MP still holds given the lack of strong re-rating catalyst while most downsides have been accounted for.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand from overseas, (iii) weaker-than-expected property sales, and (iv) foreign currency risk from weakening Ringgit.

Source: Kenanga Research - 14 Aug 2020

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SCIENTX 11.90 +0.08 (0.68%) 951,400 

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