SCIENTX has entered into an agreement for the proposed acquisition for a 65.3ac freehold land in Rawang for RM85.4m which is slated for mixed development. Project details are still sketchy with development plans and GDV yet to be finalised, but we estimate a GDV of RM592m (14.4% land cost to GDV ratio). We are neutral on the deal on minimal impact to earnings. We increase FY18E earnings by 4%. Maintain MARKET PERFORM, but increase TP to RM8.50 (from RM8.15).

Acquiring 65.3ac in Rawang. SCIENTX’s wholly-owned subsidiary Scientex Park (M) Sdn Bhd has entered into an agreement with Medium Development Sdn Bhd for the proposed acquisition of a 65.3ac freehold land in Rawang, Gombak for RM85.4m, implying a price of RM30psf. The land is the Group’s first foray into the Klang Valley and is slated for mixed development, but the total GDV, development cost, commencement and completion dates are yet to be determined. The acquisition will be funded by internally generated funds or bank borrowings, and is expected to be completed in 1HCY18 (2HFY18) (refer overleaf).

Land pricing decent. We were not overly surprised as management has always been on the look-out for land banks, and are neutral on the exercise as we do not expect significant impact to earnings. We are unable to derive a direct comparable for the said land due to minimal historical references. However, based on the assumptions of affordable residential units and a mixed development township, price per unit of RM650k on 14 units per acre, we derive a potential GDV of RM592m, implying 14.4% land cost to GDV ratio which we deem as decent. However, we note that land cost could increase on conversion premiums (from agricultural land to commercial) and re-zoning. As project details are still sketchy with management yet to guide on the finalised development plans and potential GDV, land cost to GDV may change subject to the residential to commercial mix and pricing strategies.

Outlook. The Group expects its consumer packaging plant expansion to be completed by end-CY17, and will focus on ramping up capacity going forward, while the industrial packaging segment is focused on expansion in the US with contributions accreting mostly in FY19. All in, we expect total capacity to increase to 304-340k MT p.a. in FY17-18, and sales tonnage to ramp up by c.16-27% YoY as plant utilisation increases throughout FY17-18. We believe the Group will allocate c. RM260-140m for capex in FY17-18, which we have accounted for in our estimates. As for the property segment, the Group has launched 10 new projects worth RM395m up to 9M17, which includes maiden launches in Ipoh, consisting mainly affordable properties.

Maintain FY17E but increase FY18E earnings by 4%. The launch date is yet to be finalised, but we anticipate launching in 2H18, which would increase FY18E earnings by 4.3% to RM347.3m. Going forward, FY17E net gearing will remain unchanged at 0.18x, while for FY18, it will increase marginally to 0.06x (from net cash).

Maintain MARKET PERFORM with a higher TP of RM8.50 (from 8.15). Our TP is based on our Sum-of-Parts (SoP) FY18E valuations, applying an unchanged 6.8x PER for the Property segment, which is at a 10% discount to small-mid-cap property players due to SCIENTX’s exposure in Johor, and 17.6x applied PER for the manufacturing segment. We are comfortable with our MARKET PERFORM call as foreseeable upsides and risks have been accounted for.

Source: Kenanga Research - 10 Aug 2017