This article first appeared in The Edge Financial Daily on November 16, 2018

KUALA LUMPUR: Investors reacted favourably to Scientex Bhd’s move to acquire a controlling stake in Daibochi Bhd, snapping up its shares as soon as the market opened yesterday.

The stock hit an intraday high of RM9 by the noon break, before paring gains to close at RM8.84 for a 17 sen or 1.96% gain, making it the day’s 11th-largest gainer on Bursa Malaysia.

At this level, the industrial packaging materials manufacturer’s market capitalisation stands at RM4.32 billion.

Daibochi, on the other hand, ended the day as the fourth-largest decliner with a 29 sen or 14.57% fall to RM1.70. It closed with a market capitalisation of RM557.43 million.

Scientex is acquiring a 42.21% stake in Daibochi, a flexible packaging manufacturing firm, for RM222.5 million. According to the heads of agreement signed on Wednesday, Daibochi’s shareholders would swap 5.5 of their shares for every one new share to be issued in Scientex.

At RM1.60 per share for 139.06 million shares in Daibochi, MIDF Research pointed out that the offer price represents an 18.8% discount to Daibochi’s five-day weighted average share price of RM1.97.

That being said, “the purchase consideration by Scientex values Daibochi shares at a historical price-to-earnings ratio (PER) of 20 times and price-to-book value (PBV) of 2.62 times. Both are higher than Daibochi’s 10-year average of PER at 17.1 times and PBV at 2.3 times,” said MIDF analyst Ng Bei Shan.

The research house placed the stock under review in its report yesterday, pending an investor briefing by Daibochi today.

Meanwhile, Scientex was upgraded by Kenanga Research and TA Securities Research yesterday to “market perform” from “underperform” and “buy” from “hold” respectively.

“Scientex mostly operates in the upstream plastic packaging space while Daibochi is focused on downstream end-to-end flexible packaging for multinational corporations in the consumer [sector].”

“Both companies can gain from complementary product portfolios with increased product differentiation to better serve customers while benefiting from the economies of scale,” Kenanga analyst Marie Vaz said.

TA Securities analyst Damia Othman estimated that the acquisition would add some 3% growth to Scientex’s earnings per share, assuming the group acquires control of up to 75% in Daibochi.

Kenanga raised its target price (TP) for Scientex to RM8.50 from RM7.80, while TA Securities’ TP for the stock was lifted to RM9.87 from RM9.16.

While the share swap will trigger a mandatory takeover offer from Scientex for the remaining shares of Daibochi it does not own, Scientex said it intends to maintain Daibochi’s listing status. It also wishes to retain Daibochi’s management and staff.

Scientex is acquiring the 42.21% stake in Daibochi from 14 of the latter’s shareholders.