SCIENTX is acquiring 442.8 hectares of land in Muar, Johor, for RM200m. We are positive on the latest move by SCIENTX, which will add to the pipeline of its affordable housing offerings. We maintain our forecasts but cut TP by 3% to RM3.63 (from RM3.75) to reflect the recent termination of another land deal. Reiterate MARKET PERFORM.

SCIENTX is acquiring freehold land measuring 1,094 acres in Mukim Parit Jawa, Muar, from Singapore-based Guan Hong Plantation Pte Ltd for RM200m, translating to RM4.20 per sq ft (psf). The proposed acquisition is expected to be completed in 2HCY24.

It intends to develop the land into a mixed property project. This will be SCIENTX’s first foray into the northern part of the state. We are positive as it will strengthen its presence in the Johor property market, leveraging on its successes in other parts of the state.

We believe SCIENTX is getting a good deal here, judging from asking prices for agricultural land in the same area of about RM9.20 psf. We acknowledged the discount could be attributed to: (i) the land potentially being more undulating, hence may require additional cut and fill works, and (ii) potentially lower land efficiency (i.e. sellable land as a percentage of total land area) owing to land use restrictions.

The acquisition will be financed through internally generated funds and bank borrowings. Based on our estimate of RM100m in borrowings, this is expected to increase its net debt and gearing of RM507m and 0.14x as at end-Oct 2023 to RM607m and 0.17x.

Forecasts. Maintained as earnings contribution will not be immediate.

Valuations. However, we trim our SoP-TP by 3% to RM3.63 (from RM3.75) as the RNAV enhancement from the latest land deal is more than offset by the recent termination of a land acquisition in Tebrau, Johor. We maintain our valuation basis of 12x FY24F 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 5).

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, its plastic packaging business is likely to remain in the doldrums over the near term on the back of the slowdown in the global economy. Maintain MARKET PERFORM.

Risks to our call include: (i) a sudden spike in resin prices, (ii) weak consumer demand for packaging materials due to prolonged global economic downturn, and (iii) high inflation, elevated mortgage rates and a weak job market, hurting demand for its properties.

Source: Kenanga Research - 6 Feb 2024