Scientex’s Kulai land buy expected to be completed in 2H17

Scientex Bhd (Dec 29, RM6.75)

Reiterate outperform call with an unchanged target price of RM7.57: Scientex Bhd announced that its wholly-owned subsidiary Scientex Quatari Sdn Bhd has entered into a sale and purchase agreement with Dahlia Utama Sdn Bhd, a wholly-owned subsidiary of Lee Rubber Co (Pte) Ltd of Singapore, to acquire two parcels of land measuring 49ha for RM123.64 million, or RM23.42 per sq ft in Kulai, Johor.

We gather that the acquisition is subject to approval of the Estate Land Board. The acquisition is expected to be completed in the second half of 2017 (2H17). We are “neutral” about the immediate prospect of the acquisition as gross development value details have yet to be released, indicating that development plan of the area should be over the long term.

We think the RM23.42 per sq ft valuation is fair compared with the historical average of RM15 per sq ft, in view of its proximity to Scientex’s existing townships of Taman Scientex Senai and Taman Pulai Mutiara, as well as Senai International Airport and Johor Premium Outlets. Assuming an 80-20 debt-equity funding ratio, we estimate its financial year ending July 31, 2017 (FY17) net gearing to increase to 0.3 times from 0.2 times previously, which we think remains fairly manageable.

We maintain FY17 to FY18 core net profit estimates at RM292 million to RM345 million as we estimate a minimal increase in interest cost, which will only result in less than a 1% decrease in the bottom line.

Our call is based on sum-of-parts pegged to 2017’s earnings estimates. For the manufacturing segment, we maintain our applied price-earnings ratio (PER) of 17.6 times, while for the property segment we apply a PER of 4.0 times, in line with small-to mid-cap property players.

We expect earnings to pick up in the coming quarters on continued ramp-up of its new biaxially-oriented polypropylene plant as well as expansions in its Rawang and Ipoh plants. We also note that the stronger US dollar could provide some upside potential to exporters such as Scientex and other plastic peers. — Kenanga Research, Dec 29

This article first appeared in The Edge Financial Daily, on Dec 30, 2016. Subscribe to The Edge Financial Daily here.