Scientex has proposed to acquire a consumer packaging player, MISB,from Mondi for MYR58m. Maintain BUY, with a higher SOP-based TP ofMYR8.80 (20.5% upside) while we roll over our valuation period to 2016 from FY16 (Jul). We are neutral on the minimally earnings-accretive acquisition, which could prove to be potentially cheap. We also retainour earnings forecast pending more details due in September.

Proposed acquisition. Scientex has proposed to acquire a 100% equity stake in Mondi Ipoh SB (MISB) from Mondi Consumer Packaging International (Mondi). The purchase consideration is MYR58m, funded by cash from internally-generated funds. MISB is slated to boost Scientex’s consumer packaging production capacity by about 30% to 76,800 tonnes from 60,000 tonnes. The acquisition is targeted to be completed by 11 Aug 2015. We believe funding should not be an issue as: i) net of the acquisition as of 3Q15, Scientex would have a remainingMYR5m cash position with a net gearing level of 0.33x, and ii) it also has a healthy FY15F net cash generation of MYR56m.

Neutral impact, potentially cheap. An acquisition P/E of 20.4x based on FY14 earnings appears to be on the high side, if we take into accountthe fact that its peers are trading at 18.6x (Scientex itself is trading at 10.5x). Meanwhile, MISB’s FY14 earnings of MYR2.8m would have aminimal accretive impact of ~2% to Scientex’s 2015F earnings. On the operational front, MISB’s FY14 net profit margins are also at a razor-thin2%. However, these factors combined may be moot, if synergistic benefits are realised. Based on our valuation sensitivity analysis, improving margins to 5% from its current ~2% could see the acquisition valued at a forward P/E of 8.2x.

Maintain BUY with a higher TP. We make no changes to our earnings forecasts pending more details from management, which are due in September at its FY15 analyst briefing. We maintain our BUYrecommendation, and take this opportunity to roll over our valuation period to 2016 from FY16, with a revised SOP-based TP of MYR8.80 (from MYR7.90) at an implied P/E of 9.5x 2016.