Investment Highlights

• We maintain our BUY call, forecasts and fair value of RM10.74/share for Scientex based on sum-of-parts (SOP) valuation (Exhibit 1). This pegs its manufacturing segment to FY22F P/E of 15x, at a premium to its peer stretch film makers’ average forward PE of 12.5x, to reflect its higher EPS growth rates of 21.6% and 13.2% in FY21–22F (vs. its global peers’ a weighted average of about 10% annually).

• Scientex is acquiring freehold agricultural land measuring 202.2 acres in Pulai, Johor for RM185mil cash, earmarked for a mixed development (residential and commercial) project. The GDV is yet to be determined.

• The land is located near established property township projects such as Sri Pulai Perdana 2, Bandar Pulai Jaya and Bandar Baru Kangkar Pulai, as well as Scientex’s ongoing developments Taman Pulai Mutiara and Taman Pulai Mutiara 2.

• At about RM0.9mil per acre, the price appears to be reasonable compared with two recent transactions by KSL Holdings Bhd (KSL). In 2018, KSL entered into agreements to acquire 302.5 acres of land in the same area for RM306.1mil, translating to RM1.0mil to RM1.1mil per acre.

• We note that the group’s total landbank would increase to more than 5,700 acres across Johor, Melaka, Selangor, Perak and Penang, which should keep its property development business busy for more than 10 years. This newly acquired land would also complement Scientex’s existing 661 acres of land in Pulai, encompassing mixed residential and commercial developments. These developments have a completed GDV of RM0.9bil, with an ongoing and future GDV of RM4.4bil and set to be enhanced further by this land purchase.

• The acquisition will increase Scientex’s net debt and gearing of RM628mil and 0.25x as at 31 Jul 2020 to RM813mil and 0.32x, which are still manageable. We are positive on this latest development.

• We continue to like Scientex for: (1) the strong prospects of the packaging industry due to consumer spending, a shift to the on-the-go food and beverages due to a hectic lifestyle and higher food safety standards; (2) its above-trend earnings growth rates of 21.6% and 13.2% for FY21–22F (vs. a weighted average of about 10% annually for its global peers) due to extensive R&D, cost efficiency initiatives and an M&A pipeline; and (3) A robust property development business despite the soft market in general thanks to its right focus on predominantly landed affordable residential units in secondary suburbs.

• At about 11x forward earnings in its entirety, we think that this home-grown regional/global plastic packaging player is highly compelling given its strong foothold in a consumer-fuelled sector.

Source: AmInvest Research - 22 Sept 2020