Investment Highlights

• We maintain our BUY call and forecasts, and raise our fair value (FV) to RM4.59/share (from RM4.54/share previously) for Scientex based on sum-of-parts (SOP) valuation (Exhibit 1), after reflecting the changes in its RNAV and net debt following the latest development.

• We peg Scientex’s manufacturing segment to an FY23F P/E of 18x, at a premium compared to its peer stretch film makers’ average forward PE of 12.5x, to reflect its higher fully-diluted EPS growth rates of 14.8% and 12.6% in FY21– 22F (vs. a weighted average of about 10% annually for its global peers). Our FV also imputes a 3% premium to the SOP to reflect our 4-star ESG rating (Exhibit 2).

• Scientex is acquiring freehold agricultural land measuring 343 acres in north Seberang Perai, Penang for RM246.7mil cash. Located near established property development projects such as Eco Residence, Bandar Bertam Perdana and Sena Mas, as well as Scientex’s ongoing development Scientex Tasek Gelugor, the land is earmarked for mixed development (residential and commercial) with a GDV of about RM2.0bil over 10 years based on our estimates.

• We are positive on this development. At about RM700K per acre, the price appears to be at a premium to two recent transactions. In 2016, S P Setia proposed to acquire 1,675 acres of land in Seberang Perai for RM620.1mil, translating into RM370K per acre. In 2019, Scientex acquired 180 acres of land in the same area for RM109.6mil, translating into RM600K per acre. We believe the premium reflects the general appreciation in land prices in the area.

• The latest acquisition will expand Scientex’s landbank by 6% to 6,213 acres across Johor, Melaka, Selangor, Perak and Penang, which should keep its property development business busy for more than 10 years. In terms of GDV, the acquisition will add 14% to RM16.6bil. More specifically, the acquisition will complement Scientex’s existing 180 acres of land in Seberang Perai (GDV of RM880mil) and more than triple its presence in Seberang Perai in terms of GDV with an additional RM2bil from the new land.

• The acquisition will increase Scientex’s net debt and gearing of RM888mil and 0.33x as at 31 Jan 2021 to RM1,134mil and 0.42x, which are still manageable.

• We continue to like Scientex for: (1) the strong prospects of the packaging industry due to consumer spending, a shift to on-the-go food and beverages due to a hectic lifestyle and higher food safety standards; (2) its above-trend earnings growth rates of 14.8% and 12.6% 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 its fully-diluted FY23F 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 - 6 Apr 2021