Scientex Bhd
(Aug 6, RM7.50)
Maintain buy and target price of RM8.10. Scientex has announced the proposed acquisition of a 100% stake in Malaysia-based packaging company, Mondi Ipoh Sdn Bhd (MISB), from Mondi Consumer Packaging International GmbH for cash consideration of RM58 million.

The acquisition, to be funded by internal funds, is expected to be completed by Aug 15. We are positive on the acquisition as it will allow Scientex to boost its consumer packaging production capacity by 30%, expand its clientele through offerings of various packaging products for the food and beverage, and fast moving consumer product sectors, as well as grab a bigger slice of the Asia-Pacific market.

MISB is principally involved in the manufacturing of downstream specialty consumer packaging films and film-based components including form-fill-seal bags.

It has two manufacturing plants in Sungai Siput and Chemor, Perak with a combined production capacity of 16,800 tonnes per annum. For 2014, its revenue and core net profit came in at RM141.9 million and RM2.8 million respectively.

From the price-to-book ratio and enterprise value/earnings before taxes, depreciation and amortisation valuation basis, we consider the acquisition fair. It appears to be on the high side on a price-to-earnings (PE) basis.

As at third quarter of financial year 2015 (3QFY15), Scientex’s cash stood at RM63.5 million with net gearing of 0.26 times. Upon utilisation of the cash balance to fund the acquisition, net gearing will rise to 0.33 times.

We believe risk is minimal due to the company’s strong cash flow from operations.

Scientex first cast polypropylene production lines are expected to begin commercial production by end of 2015, while the commercial run for the new biaxially-oriented polypropylene lines is slated for mid-2016.

All in, Scientex has targeted annual sales tonnage of 144,000 tonnes from its consumer packaging arm by 2017, up from the current 55,000 tonnes.

Despite the slowdown in the local property market, Scientex’s property arm mainly focuses on affordable homes, with about 90% of its new launches in the nine months of financial year 2015 (9MFY15) comprising affordable homes.

As at 3QFY15, unbilled sales stood at RM599.1 million (3QFY14: RM537.5 million), which will provide earnings visibility over the next two to three years.

As at 9MFY15, realised forex loss stood at RM18 million.  Given the recent weakening of the ringgit against the greenback, we do not discount the possibility of more forex losses to pare down its US dollar-denominated loans in subsequent quarters.

As at 3QFY15, its US dollar-denominated loans stood at RM133.9 million (about 47.4% of its total borrowings). However, we believe its US dollar debt exposure will eventually be neutralised by its rising US dollar-denominated net sales. — UOB KayHian, Aug 6

This article first appeared in digitaledge Daily, on August 7, 2015.