• Maintain BUY and MYR3.80 TP, 10% upside with c.3% FY23F (Jul) yield. We are upbeat on Scientex’s proposed land acquisition. The group plans to develop 12,000 landed affordable houses, which we believe will garner healthy demand, considering the success of its nearby townships and developments.

• The deal. Scientex has entered a conditional sale purchase agreement to acquire 960 acres of freehold land in Tebrau, Johor from SP Setia (SPSB MK, BUY, TP: MYR0.75) for a purchase consideration of MYR547.7m. Scientex plans to fund the proposed acquisition via a combination of internal funds and bank borrowings. Its net gearing was at 0.18x as at 9M23. The proposal is subject to fulfilment of conditions precedent which include the green light from the Estate Land Board, Economic Planning Unit (EPU) and, if required, shareholders’ approval.

• Recap. In 2021, Scientex entered into a sale purchase agreement to purchase the exact same parcels of land from SP Setia for a lower consideration of MYR518.1m. However, the deal fell through as Scientex failed to get approval for a waiver of the Bumiputera equity portion from the EPU before the expiry of the agreement period.

• Second time is the charm? The purchaser, Scientex Lestari was previously a wholly owned subsidiary of Scientex. However, a 30% stake in the purchaser is now owned by a Bumiputera (Dato’ Azman Bin Mahmud) who is one of its directors. Given the change in ownership structure, the deal should work out this time, as Scientex should be able to secure the EPU approval with regards to the Bumiputera equity portion requirement.

• We believe the land cost of MYR13psf is reasonable despite a 6% increase from the previous deal, given its strategic location and close proximity to malls and universities such as IKEA Tebrau and Sunway College Johor Bahru, which are easily accessible via the Senai-Desaru Expressway. The land is planned for mixed-property developments consisting of 12,000 affordable houses. Assuming a price tag of MYR300k per unit, the estimated GDV of the development would be MYR3.6bn.

• We are positive on the news as this landbank expansion would provide better economies of scale for its property segment, and bodes well with Scientex’s plan to complete 50,000 affordable houses by 2028.

• We maintain our FY23-25F earnings at this juncture, pending developments in the deal, as the entire deal is only expected to be completed in 1H2024, and the actual GDV of the project is yet to be ascertained. Our TP includes a 0% ESG discount/premium, as Scientex’s ESG score is on par with the country median.

Source: RHB Research - 6 Jul 2023