SCIENTX is acquiring 350 acres of land in Johor Bahru for RM381m cash, to be developed into a mixed-property project focusing on affordable homes. We believe SCIENTX is paying the market price for the piece of land adjacent to its existing projects. We maintain our forecasts but nudge up our TP by 3% to RM3.95 (from RM3.85). Maintain UNDERPERFORM on rich valuations.

SCIENTX is acquiring freehold land measuring 350 acres in Mukim Pulai, Johor Bahru from Singapore-incorporated Lee Pineapple Company (Pte) Ltd for RM381m cash, translating to RM25 per sq ft (psf). The proposed acquisition is expected to be completed in 1HCY25.

It intends to develop the land into a mixed property project focusing on affordable homes. The land is adjacent to its existing projects, namely Taman Pulai Mutiara, Taman Pulai Mutiara 2, and Taman Pulai Duta, allowing it to tap into its in-house resources there. This will be SCIENTX’s fourth project in Pulai. SCIENTX has thus far done well in Pulai, with more than 90% of its launched units sold.

We believe SCIENTX is getting a fair deal here, judging from: (i) asking prices for agricultural land in the surrounding areas that range from RM18 to RM25 psf, (ii) MAHSING’s recent acquisition of 100-acre land for RM23 psf in the same area, and (iii) ECOWLD’s purchase of 240-acre land at RM43 psf (which is nearer to established commercial areas and the city centre).

The acquisition will increase its net debt and net gearing from RM531m and 0.15x as at end-Jan 2024 to RM912m and 0.25x, respectively, but still manageable.

Forecasts. Maintained as the contribution from the new project on the land is unlikely to come in within our forecast periods.

Valuations. However, we raise our SoP-TP by 3% to RM3.95 (from RM3.85) as the project increases our valuation by RM203m based on a 50% discount applied to its potential RNAV. We arrive at NPV of Profit for the land of RM406m, based on net margin assumption of 26% and discount rate of 10%. We maintain our valuation basis of 12x FY25F PER for its packaging business, at a premium to sector’s average forward PER of 10x to reflect its size, being one of the largest players in the region. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 6).

Investment case. We like SCIENTX for: (i) its competitiveness in the global plastic packaging industry given its size and low-cost structure (especially, as compared with its overseas rivals), and (ii) its strong foothold in the affordable housing segment in Johor. However, we believe valuations have become rich after the recent run-up in its share price. Maintain UNDERPERFORM.

Risks to our call include: (i) a stronger and sooner recovery in the globa economy, (ii) easing of input costs, and (iii) lower mortgage rates improving affordability for its properties.

Source: Kenanga Research - 11 Jun 2024