News

Scientex Berhad (SCIENTX) announced that it has entered into a share purchase agreement with Mondi Consumer Packaging International GmbH (Mondi Group) to acquire 100% of Mondi Ipoh Sdn Bhd (MISB) for a purchase consideration of RM58.0m.

Comments

Near-term, we are overall neutral on the deal. In terms of valuation, the acquisition PER of 20.4x on FY14 adjusted earnings of RM2.84m appears slightly expensive compared to its previous major acquisition of GW Plastics for an implied postfinancing PER of 18.0x. However, we observe that during GW Plastics acquisition, SCIENTX’s own PER was 6.5x, implying a premium of 276%. For this acquisition, SCIENTX’s current PER at 10.3x implies a lower premium of 200%.

In the medium to longer term, we expect the deal to be positive, as the move should expand SCIENTX’s market share in the Consumer packaging space which sees better growth potential compared to its Industrial packaging core business. Note that the acquisition will increase its existing Consumer packaging capacity by 28% to 76.8k metric tons (MT)/year. However, the Industrial packaging portion remains larger with 147.6k MT/year capacity currently.

We gather that the acquisition will be fully funded through cash with no cash calls expected and we estimate FY15-16E net gearings to remain between 0.5-0.4x.

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

Slight upward adjustment to RM140.7m-RM158.8m (+1-2%) after imputing new contributions from the acquisition.

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

We upgrade our SoP-based TP to RM6.68 (from RM6.09) after taking into account the new earnings stream while increasing the manufacturing segment target PER to 14.0x from 12.0x. The higher PER is accorded for their move to expand in the preferred consumer packaging space and such players are currently valued at Fwd PER of 15.5x (e.g. SLP, SCGM). Our target PER of 14.0x implies a 10% discount (previously 20%) to small-mid cap Technology sector’s 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 continue to reiterate UNDERPERFORM as we reckon that its valuations are fairly rich while investors are generally wary of potential earnings risks from its property division.

Risks to Our Call

Lower-than-expected crude oil prices.

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

Source: Kenanga Research - 6 Aug 2015