SCIENTX has proposed a private placement of up to 10% of its issued shares (up to 46.3m units), potentially raising RM362m for expansion of both its property development and manufacturing segment. We were not overly surprised by the placement, and view this as a long-term positive despite being slightly earnings dilutive, as it facilitates business expansion for SCIENTX, which will accrete to earnings in the longer run. Maintain earnings. MARKET PERFORM but lower TP to RM8.50 from dilution effect.

SCIENTX has proposed to undertake a private placement of up to 10% of total issued shares (up to 46.3m units), potentially raising RM362m based on the indicative issue price of RM7.80 (which is a 6.81% to the 5-day VWAMP). However, the terms of the placement such as: (i) number of placement units, and (ii) placement price, are yet to be finalised. The proceeds will be utilized to finance the Group’s: (i) property development projects and expansion of land bank, (ii) working capital for the manufacturing business, as SCIENTX is already expanding its BOPP plant and in the United States, as well as (iii) potential expansion of the manufacturing business which includes possible acquisitions or mergers (refer overleaf). The placement is expected to be completed by 2QCY17.

Longer-term positive on the placement. While we did not expect the placement announcement, we were not overly surprised as net gearing was at 0.40x (in 1H17), which is close to the group’s internal gearing limit of 0.50x. All in all, we are long-term positive on the placement despite a slight earnings dilution in the near term as it facilitates business expansion for SCIENTX. In the immediate term, the placement will allow SCIENTX to avoid increasing borrowings to fund working capital and expansion plans for its manufacturing division, as well as property development. However, we believe the positive impact to the Group’s earnings may be more evident in the longer run upon: (i) acquisition of potential land banks which may take 2-4 years to develop and accrete to earnings, and (ii) potential synergistic benefits from any possible mergers or acquisitions, if any. Additionally, the placement will allow the Group to: (i) obtain funding from the market without incurring additional financing cost from debt, and straining earnings, and (ii) promotes greater institutional participation from investors.

We make no changes to FY17-18E earnings of RM292.3-347.3m as the Group will not be utilizing proceeds from the placement to pare down existing borrowings, while ongoing expansion plans have already been accounted for in our estimates. However, we expect proceeds from the placement to reduce our FY17E net gearing to 0.13x (from 0.30x) and FY18E to -0.03x (from 0.12x). Additionally, FY17-18E core EPS will be diluted, in the near term, to 57.3-68.1 sen (from 63.5-75.5 sen) pending plans for land banking or acquisitions in the manufacturing segment.

Maintain MARKET PERFORM on lower TP to RM8.50 (from RM9.38) post dilution impact from the placement. Our TP is based on our Sum-of-Parts FY18E valuations, applying 6.8x PER for the Property segment, which is at a 10% discount to small-mid-cap property players due to as SCIENTX’s exposure in Johor, and 17.6x applied PER of for the manufacturing segment. We are comfortable with our MARKET PERFORM call as most near-term upsides have been priced in. Although total returns do not appear attractive at current levels, we maintain our call and believe investors should hold on to the stock for excitement from upcoming acquisitions (i.e. strong inorganic growth potential) upon utilization of the placement proceeds.

Source: Kenanga Research - 28 Apr 2017