Investment Highlights

• We maintain our BUY call and forecasts, but raise our fair value (FV) by 9% to RM5.01 (from RM4.59) based on sum-ofparts (SOP) valuation (Exhibit 2), after reflecting the enhancement from the latest land acquisition. We continue to value Scientex’s manufacturing unit at 18x its FY23F earnings, at a premium to an average forward PE of 12.5x for global stretch film makers to reflect the unit’s higher earnings growth of about 13% annually in FY21–23F (vs. a weighted average of about 10% annually for its global peers). Our FV also imputes a 3% premium to the SOP valuation to reflect our 4-star ESG rating (Exhibit 3).

• Scientex is buying from S P Setia freehold agricultural land measuring 960 acres in Mukim Tebrau, Johor Bahru (JB) for RM518.1mil cash (see Exhibit 1 for the location). Located near established townships such as Taman Bukit Tiram, Austin Duta, Taman Seri Austin, Bandar Dato Onn and Taman Setia Indah, the land is earmarked for mixed development (residential and commercial) with a GDV of RM7–8bil over 10 years based on our estimates.

• At about RM12.39 per sq ft (psf), Scientex is paying an 8% premium over a March 2021 valuation of RM11.50 by independent valuers. Even with the 8% premium, the price is still significantly lower than the asking price of RM35 psf for a 299-acre freehold agricultural land up for sale in Mukim Tebrau at present, based on our search. The key difference between the two is that this 299-acre land is nearer to JB city centre (about 15km away) vs. the land Scientex is acquiring (about 28km away). We believe from Scientex’s standpoint, the 8% premium is easily “recoverable” given the economies of scale it can derive administratively from the development of one huge plot of land (vs. small land plots in multiple locations). We estimate that S P Setia will bag about RM300mil gains from the disposal.

• We are positive on the latest development. The new acquisition will increase Scientex’s landbank by 15% to 7,173 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 46% to RM24.2bil. More specifically, the acquisition will complement Scientex’s existing 2,700 acres of land in Johor (GDV of RM8,780mil) and almost double its presence in the state in terms of GDV.

• The acquisition will increase Scientex’s net debt and gearing of RM1,134mil and 0.42x to RM1,652mil and 0.61x, 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 packaging-related manufacturing unit that is projected to grow at about 13% annually in FY21-23F (vs. a weighted average of about 10% annually for its global peers), underpinned by its significant R&D spending, further improvement in economies of scale and an active M&A pipeline; and (3) a robust property development business despite the soft market in general thanks to its right focus on predominantly affordable landed residential units in 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-fueled sector.

Source: AmInvest Research - 10 May 2021