SCIENTX entered into a SPA with DKTMG Land Sdn Bhd to acquire 335.6ac freehold agricultural land in Johor for RM284.2m. Project details are minimal with development plans and GDV pending finalisation, but we estimate a GDV of RM1.9b (15.1% land cost to GDV ratio). We are neutral in the near term on the minimal impact to earnings, but positive in the longer run. Maintain MARKET PERFORM and TP of RM8.43.

Acquiring land in Johor. SCIENTX’s wholly-owned subsidiary Amber Land Berhad (formerly known as Great Wall Plastic Industries Berhad) entered into an SPA with DKTMG Land Sdn Bhd to acquire 335.6ac of freehold agricultural land in Mukim Pulai, Johor for RM284.2m, implying a price of RM19.50psf. The land is slated for mixed property development. However, management has yet to guide on total GDV, development cost, commencement and completion dates. The acquisition will be funded by internally generated funds or bank borrowings, and is expected to be completed in 2HCY18 (FY19) (refer overleaf).

Neutral for now, positive in the long run. We were fairly surprised by management’s move to further increase landbank in Johor, despite the slow Johor property market, and are neutral on the exercise as we do not expect significant impact to earnings in the near term. Due to minimal historical references, we are unable to derive a direct comparison for the said land. However historical transactions for mixed land titles (i.e. a combination of agricultural, industrial and commercial) at Mukim Pulai ranges from RM43-62psf. Based on our assumptions of affordable residential units and a mixed development township, price per unit of RM400k on 14 units per acre, we derive a potential GDV of RM1.9b, and land cost to GDV of 15.1% which we deem as decent. But note that land cost could increase on conversion premiums (from agricultural land to commercial) and re-zoning. As project details are still pending finalisation of development plans and potential GDV, land cost to GDV may change subject to the residential to commercial mix and pricing strategies.

Outlook. SCIENTX’s consumer packaging plant expansion is expected to complete by end-CY17, while the Group will focus on ramping up capacity going forward. Its industrial packaging segment is focused on expansion in the United States with contributions (<5% to earnings) accreting mostly in FY19. FY18 CNP growth will be driven by increased manufacturing capacity (+12% YoY) to 340k MT p.a. While we do not expect additional capacity in FY19, growth is premised on increased utilisation rates for the manufacturing segment in FY18-19 of 70-85%, and stable earnings from the property segment. The Group is targeting RM800-1,000m worth of launches in FY18.

Maintain FY18-19E CNP estimates of RM347.3-360.8m. Though the launch date is yet to be finalised, we anticipate the launching by FY20 due to slower launches in Johor area. As such, we leave FY18-19E unchanged. FY18 net gearing will be maintained at 0.06x while FY19E will remain in net cash post acquisition.

Maintain MARKET PERFORM and TP of RM8.43. Our TP is based on our Sum-of-Parts (SoP) FY18E valuations with; (i) an unchanged 6.8x PER for the Property segment, which is at a 10% discount to small-mid-cap property players’ PER due to SCIENTX’s exposure in the challenging Johor market, and (ii) 17.4x 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 - 18 Dec 2017