Scientex Berhad - Expanding Market Reach Via DAIBOCI

Date: 15/11/2018

Source  :  KENANGA
Stock  :  SCIENTX       Price Target  :  8.50      |      Price Call  :  HOLD
        Last Price  :  8.80      |      Upside/Downside  :  -0.30 (3.41%)

SCIENTX is proposing to acquire 42.4% of DAIBOCI for RM222.5m by issuance of new ordinary shares. We are longterm positive as it offers synergies and complementary product portfolios, as well as economies of scale. All in, we increase FY20E CNP by 5%, but EPS is unchanged post 5% dilution. Upgrade to MP (from UP) and increase SoP TP to RM8.50 post rolling forward to FY20E (from RM7.80).

Acquiring 42.4% of DAIBOCI. SCIENTX has proposed to enter into a Heads of Agreement (HOA) with DAIBOCI for the proposed acquisition of 139m ordinary shares in DAIBOCI. This represents 42.41% of DAIBOCI for a purchase consideration of RM222.5m (RM1.60 per share vs. DAIBOCI’s current share price of RM1.99), satisfied by issuance of new ordinary shares by SCIENTX (refer overleaf).

Long-term positive on synergies. We were surprised but fairly positive as a take-over of DAIBOCHI would be synergistic in the longer run as both companies operate in different ends of the manufacturing spectrum (refer overleaf).

Acquisition pricing on the higher end, but all in, neutral to SCIENTX earnings. The implied acquisition PER is not overly attractive at 20.0x (based on DAIBOCI’s audited FY17A), and is on the higher end vs. acquisitions of Klang Hock Plastic (14.1x PER), GW Plastics (18.0x PER) but closer to Mondi Ipoh (20.4x PER); however, we note that DAIBOCI has strong MNC customers, which could explain the steeper pricing. Assuming all CPs are met, we reckon the acquisition will be completed by July 2019 and full impact will be felt in FY20 for SCIENTX. We believe the acquisition is neutral to SCIENTX’s FY20 EPS as the impact to CNP is +5% to RM348.8m (based on 42.4% stake of DAIBOCI, and Bloomberg consensus estimates for FY19-20 NP, implies RM17m to SCIENTX FY20). This translates to a similar dilution of 5% to SCIENTX’s share base from current levels (refer to table in overleaf).

We make no changes to FY19E CNP but increase FY20E CNP by 5% to RM349m upon it acquiring 42.4% of DAIBOCI. However, impact to FY20E EPS is neutral, unchanged at 65.2 sen, due to dilution from potential issuance of 25.3m new shares. We do not expect any significant changes to SCIENTX earnings profile, which is mostly driven by the property segment (c. 65% of EBIT) on the segment’s strong EBIT margins of 33% vs. the plastic manufacturing segment that only makes up c.35% of EBIT due to lower EBIT margins of 7%. For comparison purposes, DAIBOCI’s manufacturing EBIT margins of c.7- 8% are decent, but at a 42.4% stake, 9M18 annualized EBIT only makes up 3% of SCIENTX FY20E EBIT, which is not overly significant. FY19-20E net gearing is also unchanged at 0.27-0.11x.

Upgrade to MARKET PERFORM (from UP) and increase TP to RM8.50 (from RM7.80) upon rolling forward our valuations to FY20 (from FY19) to better encapsulate the full-year impact to increased earnings, as well as dilution from this acquisition. Our TP is based on our Sum-of-Parts (SoP) FY20E valuations with; (i) unchanged PER of 10.0x for the Property segment, (15% discount to small-mid-cap and Johor exposed developers), and (ii) a higher PER for the manufacturing segment to 15.5x (from 14.0x) accounting for DAIBOCI’s higher PER (5-year average of 22x) likely due to its strong MNC clientele. We are comfortable with our MARKET PERFORM call post accounting for foreseeable upsides, although we may review our valuation basis again pending further confirmation of the longer-term synergies and potential mandatory take-over if the deal goes through.

Source: Kenanga Research - 15 Nov 2018

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Chart Stock Name Last Change Volume 
SCIENTX 8.80 -0.01 (0.11%) 275,700 
DAIBOCI 1.59 -0.01 (0.62%) 462,100 

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