SCIENTX is acquiring 166.5ac of freehold land in Kundang, Rawang for a total consideration of RM123.3m. Project details are minimal with development plans pending finalisation, but we estimate a GDV of RM1.2b (assuming land cost to GDV ratio of 11%). We are neutral in the near term on the minimal impact to earnings, but mildly positive over the longer run. Maintain FY19-20E CNP of RM309-349m. Maintain MP and TP of RM8.50.

Acquiring lands in Kundang, Rawang for RM123.3m. SCIENTX via Scientex Park (M) Sdn Bhd (a wholly-owned subsidiary) has entered into two SPAs with; (i) Swan Lake City Sdn Bhd (Land 1) for 3 parcels of freehold land in Kundang of 150ac for RM111.2m, and (ii) Fair City Sdn Bhd (Land 2) for 2 parcels of freehold land in Kundang of 16ac for RM12.1m, both implying a price of RM17.0psf. The land is slated for mixed property development, but further details such as total GDV, development cost, commencement and completion dates are too preliminary to ascertain. Both lands are adjoining and strategically located with access to three major highways, namely LATAR Highway, Guthrie Highway and North-South Highway via the Rawang South Interchange. The acquisition will be funded by internally generated funds or bank borrowings, and is expected to be completed in 1HFY20.

Neutral for now, mildly positive in the longer run. We were not overly surprised by SCIENTX’s land banking as the Group does from time to time pursue land acquisitions. Furthermore, we believe it may have been opportunistic as pricing is decent at RM17.0psf vs. SCIENTX’s previous acquisition in nearby Rawang for RM30.0psf (in 2017). That said, we are neutral on the acquisition and do not expect significant impact to earnings in the near term. Based on our assumptions of affordable residential units and a mixed development township, price per unit of RM500k on 14 units per acre, we derive a potential GDV of RM1.2b, with land cost to GDV percentage of 11% which we deem as decent. However, note that land cost could increase on conversion premiums and re-zoning. As project details are still pending finalisation, land cost to GDV may change subject to the residential to commercial mix and pricing strategies.

Outlook. SCIENTX’s plastic manufacturing arm is focused on ramping up utilisation, targeting above 70% over the next few years, mostly from its BOPP plant and Arizona plant in the United States which will mostly contribute from FY19 onwards. SCIENTX’s growth is premised on gradual improvement in utilisation rate for the manufacturing segment, and full-year contribution from KHPI in FY19-20, whilst backed by its stable property segment. Maintain FY19-20E CNP of RM309-349m, on launches of RM1.1-1.2b in FY19-20, and manufacturing utilisation rates of 65-70% in FY19-20. Post this land acquisition, net gearing in FY20 is expected to increase to 0.29x (from 0.25x). We do not expect any near-term launches from these two parcels of land. Maintain MARKET PERFORM and Target Price of RM8.50. Our TP is based on FY20E SoP valuation with; (i) an unchanged PER of 10.0x for the Property segment, which is at a 13% discount to small-mid-cap property players and Johor-exposed peers’ PER due to SCIENTX’s exposure in the challenging Johor market, and (ii) an unchanged applied PER of 15.5x for the manufacturing segment (at 14% discount compared to SLP’s applied PER given its lower margins of 6-7% vs. 15%, but above TGUAN (9.0x PER) given its earnings stability. Maintain MARKET PERFORM as we believe we have priced in most foreseeable positives.

Source: Kenanga Research - 14 May 2019