This article first appeared in The Edge Malaysia Weekly on September 20, 2021 - September 26, 2021

ANALYSTS like the proposal by Scientex Bhd to take flexible plastic packaging producer Daibochi Bhd private, viewing it as fair and a win-win solution for both companies.

From a valuation standpoint, the offer price by Scientex - one of the world's largest producers of stretch film products - to acquire the remaining 38.12% of shares that it does not own in Daibochi is deemed fair.

As for synergies, the deal would help the flexible plastic packaging producer leverage the larger scale of Scientex's manufacturing facilities in Malaysia, Southeast Asia and the US. For Scientex, gaining full control of Daibochi will enhance the group's competitive edge.

In its privatisation proposal last Monday, Scientex offered to pay RM2.70 per Daibochi share and 32 sen per warrant, which amounts to RM345.3 million.

As Scientex is already Daibochi’s largest shareholder, with a 61.88% stake, its offer is not conditional upon any minimum level of acceptances of the offer shares, given that Scientex already holds more than 50% of the voting shares in Daibochi.

Private investor and former investment banker Ian Yoong Kah Yin says the offer price for Daibochi’s shares is fair, as the enterprise value to the earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) is at 12 times, based on Daibochi’s expected earnings for the financial year ended July 31, 2021.

“The EV/Ebitda at 12 times is attractive. Minority shareholders should accept the offer and use the proceeds to invest in Scientex shares, which are fundamentally attractive at current levels. This would be fairly similar to the earlier takeover, whereby the vendors of Daibochi shares received Scientex shares in exchange,” Yoong tells The Edge.

In 2019, Scientex launched a mandatory takeover of Daibochi after it acquired a 42.41% stake, from several individual vendors who held controlling blocks in the latter, for RM222.5 million in a share swap deal. After the mandatory general offer, Scientex’s stake in Daibochi increased to 61.88%.

CGS-CIMB Research, in a note last Monday, assessed the takeover price of RM2.70 as within the ambit of its fair valuation. “The takeover price values Daibochi at 19.1 times its FY2021F earnings, or 18.3 times FY2022F PE (price-earnings), if based on our FY2021 to FY2023 forecasts. This puts it within the vicinity of its 10-year average PE of 18.6 times.”

Kenanga Research in a Sept 14 note said that, by ascribing a PE ratio of 13 times to Bloomberg’s consensus FY2022 core net profit of RM65.7 million, Daibochi’s fair value per share works out to RM2.60.

“Thus, the offer price of RM2.70 is fair, as the 4% premium is justifiable to gain full control of Daibochi. The 13 times ascribed PE ratio [for Daibochi] is lower than our peers’ average of 15.5 times, owing mainly to its lack of pricing power,” the firm added.

TA Securities analyst Jeff Lye Zhen Xiong estimates that the acquisition of the 38.1% stake in Daibochi would increase Scientex’s annual profit by RM25 million, excluding interest expenses.

“Post-acquisition, we believe Scientex would be able to grow Daibochi more aggressively, with both operational and financial support,” he tells The Edge.

Yoong cautions that the financial benefits of the privatisation will not be immediate. “This privatisation [will enable] Scientex to consolidate its dominant position downstream in plastic packaging. Scientex has had greater pricing power in its flexible packaging products ever since it acquired competitors.

“Users of flexible packaging products informed me that prices have increased 10% to 15% over the past two years. Granted that raw material costs have inched up, the bulk of the price hike will flow to the bottom line; gross and net profit margins should increase by 20% to 25% over the next two to three years.

“Scientex, Thong Guan Industries Bhd and other listed companies in this segment will be major beneficiaries from the shakeout in the flexible packaging sector, which is a beneficiary of the Covid-19 lockdown globally and the boom in online shopping.”

CGS-CIMB believes the reasons for Scientex’s decision to take Daibochi private stem from the latter’s short- and long-term pitfalls. “We had already seen Daibochi failing to grow its 9MFY2021 (the first nine months of its financial year ended July 31) sales and core net profit, owing to shipping constraints in the wake of the Covid-19 pandemic. Increasing logistics and raw materials costs, meanwhile, gradually ate into its quarterly pre-tax margins, from 11% in 1QFY2021 to 8.5% in 3QFY2021.

Daibochi saw a marginal 1% year-on-year increase in 9MFY2021 sales to RM468.14 million, while operating profit decreased 12.2% to RM47.24 million on the back of higher raw material prices.

On the other hand, Scientex posted a 16.1% increase in operating profit for 9MFY2021 to RM424.52 million, while revenue grew 4.7% to RM2.69 billion. Scientex’s packaging business contributed 70% to revenue and the property development business, the remaining 30%.

Scientex CEO Lim Peng Jin says the move will allow Daibochi to leverage the Scientex group’s capital resources to capture business opportunities expediently.  “For example, when there arises expansion or M&A opportunities for Daibochi, its balance sheet may not be adequately sized to take on the deal, leading to a missed opportunity. By being a fully owned entity of the Scientex group, Daibochi will be better positioned to react to opportunities in the marketpl ace,” Lim says in an emailed response to The Edge.

The ability to access and mobilise the vast manufacturing capabilities and facilities of the group is another consideration, he adds.

“As both Scientex and Daibochi are public-listed entities, the former being the parent of the latter, business transactions between both companies will invariably constitute as related party transactions. Thus, transactions will require the due process of seeking approvals from shareholders on both sides. This may lead to delays and inefficiency in execution of strategies.

“On that premise, the pandemic has tested the readiness of the current corporate structure. For example, when Daibochi could operate at only 60% of workforce capacity in compliance with Movement Control Orders, order fulfilments were challenging because of the inability to reroute production requirements to other available resources within the Scientex group. Therefore, having full control of the operations will optimise the structure and enable Daibochi to leverage Scientex’s multi-location facilities to meet customers’ needs quickly and on a larger scale.”

Since the announcement last Monday, Daibochi shares had appreciated 13% to close at RM2.69 last Wednesday, which translates into a market capitalisation of RM880.63 million. Scientex shares inched up 2% to RM4.64, valuing the company at RM7.2 billion.

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