News

Scientx Berhad (SCIENTX) announced that it has entered into a second Share Sale Agreement (SSA) with Futamura Chemical Co., Ltd (Futamura) to sell 5% or 5.0m shares in Scientex Great Wall Sdn. Bhd. (SGW), for a total cash consideration of RM40m via the exercise of an option granted to Futamura under the first SSA.

Comments

We are neutral on the SSA as it had been previously announced that Futamura is entitled to purchase up to 20% of the issued and paid up capital of SGW. The latest SSA will bring Futamura’s ownership in SGW to 10% from 5% previously. To recap, SCIENTX and Futamura entered into a Strategic Alliance Agreement in Aug-14 to build its BOPP film manufacturing plant and develop its consumer packaging business.

We think the purchase consideration of RM40m is fair as it matches the amount paid in the previous SSA of RM40m. Note that the purchase price for Futamura’s option to buy up to another 10% of SGW is yet to be determined.

Furthermore, the implied PBV of the stake at 2.2x is in line with FY14 group PBV of 2.1x and the first SSA PBV of 2.3x.

We gather that the proceeds of the sale will be used to pare down group borrowings, hence we expect net gearing to slightly decline from 0.54x to 0.49x after the sale is completed.

Outlook

The expansion of its CPP and BOPP films capacities are on track for completion by mid-2016, but we have only imputed minimal contribution pending further clarity on potential uptake due to the massive scale of expansion.

The overall property market is expected to be challenging in 2015, especially in Johor. Going forward, we think its property segment sales could slacken due to tighter lending policies and poor market sentiment. However, SCIENTX’s affordable housing focus should provide some earnings resiliency.

Forecast

There is no material earnings adjustment after accounting for the slightly lower net interest cost.

Rating

Maintain UNDERPERFORM

Manufacturing earnings growth from capacity expansion will only kick in from FY17 onwards, while for the property segment (which made up 77% of 9M15 earnings), outlook remains unexciting in the near-term.

Valuation

No change to our SoP-based TP of RM6.09 based on manufacturing segment target PER of 12.0x. Our target PER of 12.0x is based on a 20% discount to small-mid cap Technology sector average PER of 15.5x as the Plastics sector is similarly driven by the USD export play which should benefit from a weaker ringgit.

However, we apply a 20% discount for SCIENTX’s manufacturing target PER due to its Industrial packaging focus which has lower margin and slower earnings growth compared to the Consumer packaging sub-sector.

Risks to Our Call

Lower-than-expected crude oil prices.

Better-than-expected property sales forecast and/or margins.

Source: Kenanga Research - 24 Jul 2015