SCIENTX is acquiring 179.7ac of 6 parcels of freehold land in Seberang Prai, Penang for RM109.6m. Targeted for mixed development, project details for the land are minimal pending finalisation. We estimate a GDV of RM1.1b (assuming land cost to GDV ratio of 10%). Expect neutral impact to earnings in the near term, but mildly positive over the longer run. Maintain FY19-20E CNP of RM309-349m. Maintain MP and TP of RM8.50.

Acquiring land in Penang for RM109.6m. SCIENTX via its wholly owned subsidiary Scientex (Skudai) Sdn Bhd is acquiring six parcels of freehold land from Palma Indah Sdn Bhd for RM109.6m, implying a price of RM14.0 psf. 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 be ascertained. The land is in Tasek Gelugor town, and easily accessible from all directions from Butterworth, Kepala Batas and Padang Serai, Kedah and can access the North-South expressway via Kepala Batas easily (approximately 9km away). The acquisition will be funded by internally generated funds or bank borrowings and is expected to be completed in 2HFY20.

Neutral on the acquisition. We were not overly surprised as SCIENTX pursues land banking activities regularly while we also believe the pricing is decent at RM14.0psf vs. other land transactions within that area that range from RM8.50psf to RM15.00psf. However, we are neutral on the acquisition and do not expect significant impact to earnings in the near term as the project may not commence immediately. Based on our assumptions of affordable residential units and a mixed development township, price per unit of RM450k (vs. surrounding areas pricing of RM400-500k per unit) of 14 units per acre, we derive a potential GDV of RM1.1b, implying a land cost to GDV percentage of 10% which we deem as decent (vs. recent acquisitions land cost to GDV of c.11%). That said, land cost could increase on conversion premiums and re-zoning. Pending project details from management, land cost to GDV may change subject to the residential to commercial mix and its pricing strategies.

Outlook. SCIENTX’s plastic manufacturing segment 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 start contributing 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 on targeted launches of RM1.1-1.2b in FY19-20, and manufacturing utilisation rates of 65- 70% in FY19-20.

Maintain FY19-20E CNP of RM309-349m, as we do not expect any near-term launches from these parcels of land and as such do not foresee any accretion to earnings for now. However, post this land acquisition by 2HFY20, net gearing in FY20E is expected to increase to 0.33x (from 0.29x).

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 12% discount to small-mid-cap property players and Johor-exposed peers 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 margin 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 - 11 Jun 2019