Scientex  has  entered  into  an  agreement  with  Japan’s  Futamura Chemical (FutChem) to build a biaxially-oriented polypropylene (BOPP) film  manufacturing  plant  in  Malaysia  with  production  capacity  of  60k tonnes  p.a.  We  are  positive  on  this  as  Scientex  can  leverage  on  the latter’s technical expertise to expand its consumer packaging business in the long run. This new plant could increase its BOPP film production capacity by 10-fold. Maintain BUY and MYR7.19.
 
Salient  details.  FutChem  specialises  in  manufacturing  plastic-  and cellulose-based  packaging  film.  Under  the  agreement,  FutChem  will subscribe for a 5% equity interest in Scientex’s consumer packaging arm Scientex  Great  Wall  SB  (SGW),  with  pricing  to  be  determined  later.  FutChem  will  be  entitled  to  purchase  up  to  a  20%  stake  in  SGW  within the  next  five  years.  Upon  completion  of  the  BOPP  film  plant,  FutChem will  be  allocated  30%  of  the  production  capacity  at  approximately  1.5k tonnes per month for sale and distribution in Japan.  

Positive  on  the  partnership.  This  partnership  in  our  view  is  a  win-win deal  for  both  Scientex  and  FutChem,  as  Scientex  can  leverage  on  the latter’s  technical  expertise  in  consumer  packaging  business  while FutChem may benefit from lower manufacturing costs in Malaysia vis-à-vis  Japan.  To  recap,  SGW currently  houses  annual production  capacity of 51k tonnes of polyethylene (PE) film and 6k of BOPP film. Should this partnership materialise, SGW’s BOPP film manufacturing capacity could increase  10-fold  to  66k  p.a.  We  estimate  that  this  new  plant  could  cost MYR200m-250m.  Assuming  that  this  will  be  fully-funded  via  borrowings and cash in hand, Scientex’s net gearing could increase to 0.77x (from 0.41x as of April 2014), which we deem manageable taking into account its annual operating cash flow of over MYR100m.  

Earnings  accretion.  We  estimate  that  this  new  plant  could  bring  in earnings  accretion  of  MYR20m-25m  p.a.  to  Scientex  after  netting  off FutChem’s potential 20% minority interests in SGW. This could bump up Scientex’s earnings base by 10-12.5% come FY18. We expect the plant to commence operations in  phases, with the first phase  likely to start in early 2017.

Maintain BUY. All in, we are positive on the announcement. We expect the  partnership  to  be  officially  firmed  up  by  end-September  with  more financial details to be unveiled. Maintain BUY on Scientex, with our SOP-based FV unchanged at MYR7.19.

Recommendation Chart

Source: RHB