SCIENTX has entered into a SPA to acquire Klang Hock Plastic Industries Sdn Bhd (KHPI) for RM190m, increasing its manufacturing capacity (+28%) to 455k MT p.a. by end FY18. We were not overly surprised, and are neutral to mildly positive on the deal as the acquisition price is attractive, while impact to earnings is mildly positive. Increase FY18-19E CNP by 0.8-4.4%. Maintain MARKET PERFORM but increase TP to RM9.00 (from RM8.40) post rolling forward to FY19E.

Acquiring Klang Hock Plastic Industries for RM190m. SCIENTX’s wholly-owned subsidiary Scientex Packaging Film Sdn Bhd has entered into a sale and purchase agreement (SPA) to acquire Klang Hock Plastic Industries Sdn Bhd (KHPI) for a purchase consideration of RM190m. This will be satisfied via a combination of internal funds and bank borrowings and is expected to be completed by 2QCY18 (4Q18). The acquisition has an RM18m PBT guarantee for KHPI’s financial period ending 31st March 2019.

Positive on the acquisition. We were not overly surprised by this acquisition as SCIENTX has remained aggressive on its expansion plans, both organically, and inorganically. We view this acquisition positively as the estimated PER of 14.1x (based on the guaranteed amount of RM18m PBT), is still cheaper than previous acquisition of Mondi Ipoh at 20.4x PER and acquisition of GW Plastics at 18.0x PER. We are in favor of the rationale as it strengthens SCIENTX’s position in the global flexible plastic packaging market and expands its clientele reach (refer overleaf). This acquisition will increase SCIENTX’s manufacturing capacity by 28% to 455k MT p.a. by end FY18.

Outlook. SCIENTX’s is focused on ramping up capacity at its consumer packaging plant in FY18. Its industrial packaging segment is working on expansion in the United States with contributions (<5% to earnings) accreting mostly in FY19. FY18 CNP growth will be driven by increased manufacturing capacity (+44% YoY) to 455k MT p.a. While we do not expect additional capacity in FY19, growth is premised on; (i) increased utilisation rates for the manufacturing segment in FY18-19 of 70-85%, (ii) full-year contributions from KHPI, and (iii) stable earnings from the property segment. The Group is targeting RM800-1,000m worth of launches in FY18.

Mild positive to FY18-19E CNP. Post imputing for the additional capacity, we expect FY18-19E to increase by 0.8-4.4% to RM349.2- 374.4m. We are assuming a 70:30 debt:cash ratio to fund this acquisition in FY18 as the Groups has other payment commitments (i.e. Rawang land acquisition). Post the acquisition, we expect net gearing to increase to 0.15-0.06x in FY18-19E (from 0.05x in FY18 and net cash in FY19).

Maintain MARKET PERFORM but increase TP to RM9.00 (from RM8.40) post increasing our earnings, and rolling forward our valuation to FY19E. Our TP is based on our Sum-of-Parts (SoP) FY19E valuations with; (i) an unchanged 6.8x PER for the Property segment, which is at a 10% discount to small-mid-cap property players due to SCIENTX’s exposure in the challenging Johor market, and (ii) 17.4x applied PER for the manufacturing segment. We are comfortable with our MARKET PERFORM call as foreseeable upsides and risks have been accounted for.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand from overseas, (iii) weaker-than-expected property sales, (iv) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share.

Source: Kenanga Research - 26 Feb 2018