Kenanga Research is positive on the latest land acquisition by Scientex Bhd in Muar, Johor as it will add the pipeline of its affordable housing offerings.
However, to reflect the recent termination of a land acquisition in Tebrau, Johor, Kenanga maintained its forecasts but cuts its target price (TP) by 3% to RM3.63 from RM3.75 in its Company Update today (Feb 6).
Scientex is acquiring freehold land measuring 442.8 ha (1,094 acres) in Muar, from Singapore-based Guan Hong Plantation Pte Ltd for RM200 million, translating to RM4.20 per sq ft. The proposed acquisition is expected to be completed in 2HCY24.
The research house said the property developer and plastics manufacturer intends to develop the land into a mixed property project, which will be the group’s first foray into the northern part of Johor.
“We are positive as it will strengthen its presence in the Johor property market, leveraging on its successes in other parts of the state.”
Kenanga believes that Scientex 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 the land potentially being more undulating, hence may require additional cut and fill works, potentially lower land efficiency owing to land use restrictions.
“The acquisition will be financed through internally generated funds and bank borrowings. Based on our estimate of RM100 million in borrowings, this is expected to increase its net debt and gearing of RM507 million and 0.14x as at end-Oct 2023 to RM607 million and 0.17x,” it added.
It reiterated its MARKET PERFORM call and forecasts as earnings contribution from the land acquisition will not be immediate.
“However, we trim our sum of parts (SoP)- target price (TP) by 3% to RM3.63 from RM3.75 as the revalued net asset value (RNAV) enhancement from the latest land deal is more than offset by the recent termination of a land deal.
“We maintain our valuation basis of 12x FY24F PER for its packaging business, at a premium to sector’s average forward price-earning ratio (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,” it added.
It likes Scientex for its competitiveness in the global plastic packaging industry given its size and low cost structure, 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.”
The risks to Kenanga’s call include a sudden spike in resin prices, weak consumer demand for packaging materials, and high inflation, elevated mortgage rates and a weak job market.
