ANALYSTS VIEW Scientex Bhd’s plan to acquire flexible plastic packaging manufacturer Daibochi Bhd as reasonable and a win-win situation for both companies.
The offer price made by Scientex – one of the world’s largest producers of stretch film goods – to acquire the remaining 38.12 percent of Daibochi shares that it does not already hold is found to be reasonable.
In terms of synergies, the transaction enables the flexible plastic packaging manufacturer to leverage Scientex’s broader manufacturing footprint in Malaysia, Southeast Asia, and the United States. Gaining complete control of Daibochi will strengthen Scientex’s competitive position.
A reasonable offer price
Scientex offered RM2.70 each Daibochi share and 32 sen per warrant in its privatisation proposal last Monday, totaling RM345.3 million.
Given that Scientex is currently the largest stakeholder in Daibochi, with a 61.88 percent holding, its offer is not conditional on a minimum level of acceptances of the offer shares, given that Scientex already owns more than 50% of Daibochi’s voting shares.
Ian Yoong Kah Yin, a private investor and former investment banker, believes the offer price for Daibochi’s shares is reasonable, as the enterprise value to earnings before interest, taxes, depreciation, and amortisation (EV/Ebitda) ratio is 12 times, based on Daibochi’s expected earnings for the fiscal year ended July 31, 2021.
“The EV/Ebitda ratio of 12 is appealing. Minority owners should accept the offer and reinvest the funds in Scientex shares, which are now trading at a discount to their intrinsic value. This would be comparable to the earlier takeover, in which the vendors of Daibochi shares were compensated with Scientex shares,” Yoong told.
Scientex initiated a required takeover of Daibochi in 2019 after acquiring a 42.41 percent stake in the latter for RM222.5 million in a share swap arrangement with numerous individual suppliers who held controlling blocks in the latter. Scientex’s stake in Daibochi climbed to 61.88 percent following the necessary general offer.
CGS-CIMB Research rated the takeover price of RM2.70 as being within the range of its fair valuation in a note last Monday. “Based on our FY2021 to FY2023 expectations, the buyout price values Daibochi at 19.1 times FY2021F earnings or 18.3 times FY2022F PE (price-earnings). This places it close to its ten-year average PE of 18.6 times.”
Kenanga Research stated in a Sept 14 note that applying a PE ratio of 13 to Bloomberg’s estimate FY2022 core net profit of RM65.7 million results in an RM2.60 fair value per share for Daibochi.
“Thus, the offer price of RM2.70 is reasonable, as the 4% premium is justified in order to acquire complete control of Daibochi. The 13 times attributed PE ratio [for Daibochi] is less than the 15.5 times average for our peers, owing primarily to the company’s lack of pricing power,” the business stated.
A more cost-effective and operationally efficient structure
According to TA Securities analyst Jeff Lye Zhen Xiong, acquiring 38.1 percent of Daibochi would boost Scientex’s yearly profit by RM25 million, excluding interest charges.
“We anticipate that Scientex would be able to rapidly grow Daibochi following the acquisition, with both operational and financial support,” he tells.
Yoong emphasises that the financial benefits of privatisation will take time to materialise. “Through this privatisation, Scientex will be able to further strengthen its downstream dominance in plastic packaging. Since acquiring competitors, Scientex has increased its pricing leverage in its flexible packaging goods.
“I was informed by users of flexible packaging products that prices have grown 10% to 15% in the last two years. Given the incremental increase in raw material costs, the majority of the price increase will go to the bottom line; gross and net profit margins should improve by 20% to 25% over the next two to three years.
“Scientex, Thong Guan Industries Sdn Bhd, and other listed firms in this segment will benefit significantly from the shakeout in the flexible packaging sector, which has benefited from the global Covid-19 shutdown and the growth of online shopping.”
CGS-CIMB believes Scientex’s decision to privatise Daibochi is motivated by the latter’s short- and long-term risks. “We had already witnessed Daibochi struggle to boost its 9MFY2021 (first nine months of fiscal year ended July 31) revenues and core net profit, owing to shipping difficulties caused by the Covid-19 epidemic. Meanwhile, rising logistics and raw material prices rapidly eroded the company’s quarterly pre-tax margins, which fell from 11% in 1QFY2021 to 8.5 percent in 3QFY2021.
Daibochi’s 9MFY2021 sales increased marginally by 1% year on year to RM468.14 million, while operating profit declined 12.2% to RM47.24 million due to increasing raw material prices.
Scientex, on the other hand, increased operating profit by 16.1% to RM424.52 million in 9MFY2021, while revenue increased by 4.7 percent to RM2.69 billion. Scientex’s packaging business accounted for 70% of sales, while the property development business accounted for 30%.
As Scientex asserts
Scientex CEO Lim Peng Jin said the move will enable Daibochi to quickly seize business opportunities by leveraging the Scientex group’s cash resources. “For instance, when Daibochi’s expansion or M&A prospects occur, its balance sheet may be insufficiently big to support the transaction, resulting in a squandered opportunity. Daibochi will be better positioned to respond to market opportunities as a wholly owned subsidiary of the Scientex group, Lim says.
Access to and mobilisation of the group’s enormous industrial capabilities and facilities is another factor to consider, he adds.
“Because both Scientex and Daibochi are publicly traded corporations, with the former serving as the parent company of the latter, commercial transactions between the two firms will necessarily be considered related party transactions. Thus, transactions will be subject to the normal approval process, which includes requesting approval from shareholders on both sides. This may result in strategy execution delays and inefficiencies.
“On that basis, the pandemic has put the current corporate structure to the test. For example, when Daibochi could only function at 60% of its labour capacity to comply with Movement Control Orders, order fulfilment became difficult due to the inability to redirect production requirements to other Scientex group resources. As a result, having complete control of the operations optimises the structure and enables Daibochi to leverage Scientex’s multi-location facilities to satisfy customer needs more rapidly and efficiently.”
Since Monday’s announcement, Daibochi shares have increased 13% to finish at RM2.69 on Wednesday, equating to a market value of RM880.63 million. Scientex’s stock rose 2% to RM4.64, valuing the firm at RM7.2 billion.
Published by Zack Baharum