Scientex Berhad (?SCIENTX?) has proposed to acquire two parcels of land in Kulai, Johor totalling 121.2 acres for RM123.6m, or RM23.42 psf. We are near-term neutral on the news but long-term positive on development prospect. No change to FY17-18E earnings as interest cost impact to bottom line is minor (<1%) with manageable net gearing increase to 0.3x (from 0.2x). Maintain OUTPERFORM with unchanged TP of RM7.57.

Acquiring 121.2 acres in Kulai. SCIENTX announced that its wholly-owned subsidiary Scientex Quatari Sdn. Bhd. has entered into a Sale and Purchase Agreement with Dahlia Utama Sdn. Bhd, a wholly-owned subsidiary of Lee Rubber Co. (Pte) Ltd of Singapore, to acquire two parcels of land measuring 121.2 acres for RM123.64m, or RM23.42 psf. We gather that the acquisition is subject to approval of the Estate Land Board. The acquisition is expected to be completed in 2HCY17.

Short-term neutral, long-term positive. We are neutral on the immediate prospect of the acquisition as GDV details are yet to be released, indicating that development plan of the area should be over the long-term. We think valuation is fair at RM23.42 per square foot (psf), compared to the historical average of RM15 psf, in view of its proximity to SCIENTX?s existing townships of Taman Scientex Senai and Taman Pulai Mutiara, as well as Senai International Airport and Johor Premium Outlets. Assuming a 80-20 debt-equity funding ratio, we estimate FY17E net gearing to increase to 0.3x from 0.2x, which we think remains fairly manageable.

Maintain FY17-18E CNP at RM292-345m as we estimate a minimal increase in interest cost resulting in <1% decrease in bottom line.

Reiterate OUTPERFORM with unchanged TP of RM7.57 based on Sum-of-Parts pegged to CY17E earnings. For the Manufacturing segment, we maintain our applied PER of 17.6x, while for Property segment, we apply a PER of 4.0x, in line with small-mid-cap property players. We expect earnings to pick up in the coming quarters on continued ramp-up of its new BOPP plant as well as expansions in its Rawang and Ipoh plants. We also note that the stronger USD could provide some upside potential to exporters such as SCIENTX and other plastic peers.

Source: Kenanga Research - 29 Dec 2016