News  Last Friday, Scientex Bhd (SCIENTEX) announced that it has entered into a Strategic Alliance Agreement (SAA) with Futamura Chemical Co. Ltd. (FCC) to: (i) build a biaxially oriented polypropylene (BOPP) film manufacturing plant and (ii) develop and grow the consumer packaging markets.

 Under the SAA: (i) FCC shall be entitled to purchase up to 20% of the issued and paid up capital of Scientex Great Wall Sdn Bhd (SGW) with an initial subscription of 5% of the issued and paid up capital of SGW, (ii) FCC shall have a 30% right to the production capacity of the plant of c.1,500MT/month and BOPP film for sale and distribution in Japan, and (iii) SGW to assist and develop, market and sell FCC products or products developed using FCC technology to existing and new markets in the Southeast Asia region.

Comments  We are positive on this Strategic Alliance as it would enable SCIENTEX to increase its BOPP film production capacity and also to gain a larger share of the Southeast Asia market.

 However, management has yet to finalize the details such as capex, funding method and timeline of the new plant construction.

 Current BOPP film capacity only stands at 6,000MT p.a., imputing the new plant capacity of 1,500MT/month, this would increase SCIENTEX’s BOPP film production capacity by 3 times to 24,000MT p.a.

Outlook  We believe the SAA will further enhance SCIENTEX’s earnings prospects and increase its market share in the BOPP film segment going forward.

 While the rise in raw material prices has affected margins for the manufacturing segment, we remain positive on SCIENTEX's longer term prospects. Ongoing expansion plans for higher margin consumer packaging films and product extensions such as the thinner gauge film (6 microns) should provide an added buffer against margin contractions.

 The company is currently exploring new export markets in Asia Pacific and selected EU countries, which may further boost the manufacturing segment’s sales going forward.

 At the same time, the expansion of its blown film lines for its consumer packaging division is on track and expected to be completed by 2014, which would provide revenue growth impetus.

Forecast  We are maintaining our FY14E-15E earnings estimates for now, pending further clarity from management on the SAA.

Rating Maintain OUTPERFORM

Valuation  Maintain TP of RM6.34, based on an unchanged 10% holding company discount to its SoP valuation.

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

 Property sector risks, including negative policies.

Source: Kenanga