News  Yesterday, Scientex announced that it had entered into a Share Sale Agreement (SSA) to acquire the entire equity interest in Seacera Polyfilms Sdn Bhd (Seacera Polyfilms), a manufacturer of biaxially oriented polypropylene (BOPP) films which is used for packing purposes.

 The total purchase consideration amounts to RM40.0m, which will be funded by internally generated funds and/or bank borrowings.

 Subject to the approvals of relevant authorities and the shareholders of the Seacera Polymer Sdn Bhd and Seacera Group Berhad, the proposed acquisition is expected to be completed during the current financial year.

Comments  We are positive on the proposed acquisition as it would enable Scientex to diversify into an essential component of the consumer packaging product industry, and also to gain a larger share of the market.

 Based on the announcement, Seacera Polyfilms recorded revenue of RM44.5m and net profit (NP) of RM0.5m for the year ending 31st Dec 2012. However, we understand that the low NP figure was due to management fees owed to Seacera Group which would be reversed under the SSA. Assuming this to be the case, Seacera Polyfilm's NP would have been RM2.8m. This implies an acquisition PER of 14.3x based on the RM40.0m price tag, and a P/B of 2.1x.

 This is in line with the 14.4x PER paid for the acquisition of the Great Wall Plastic Industries earlier in the year. At the same time, the P/B of 2.1x is also equivalent to Scientex's current P/B, which we deem to be fair pricing.

 We also reckon that Scientex should not have any issues with funding as its its net gearing ratio would only increase from 0.26x to 0.35x, assuming the RM40.0m acquisition is funded entirely by borrowings. This would still be within management's comfortable levels of 0.25-0.5x.

Outlook  Better earnings prospects are expected on the back of new capacities and expansion plans. By July 2014, Scientex would have annual capacities of 194k MT (+40k MT via 3 new production lines) for the stretch film segment and 51k MT for the blown film segment (+17k MT via 5 new production lines).

 This would enable the Group to establish a foothold in the relatively untapped thin-film market (stretch film), at the same time alleviating bottlenecks blown film capacity which would open up opportunities to utilise the excess capacities in its downstream printing and lamination segments which entails better margins.

Forecast  While we believe that the acquisition will enhance Scientex's earnings and prospects going forward, we are maintaining our FY14E-FY15E earnings estimates of RM155.0m-RM182.8m for now, pending further clarity from management.

Rating Maintain OUTPERFORM

  We remain positive on Scientex ongoing expansion plans and earnings potential within the manufacturing segment, which could accelerate the prospects of spinning off the Group’s property division, which would be a rerating catalyst for the stock.

Valuation  Maintain TP of RM6.28, based on blended SOP valuation.

Risks to Our Call    Sharp increases to crude oil/resin prices which could disrupt the raw material pass-through mechanism.

 Property sector risks, including negative policies. 

Source: Kenanga