Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.

Saturday, November 16, 2013

Scientex Berhad 森德综合 latest acquisition of Seacera Polyfilms

At first glance of the announcement, I have no idea who and what Seacera is doing. But I always think it's good when you acquire somebody rather than being acquired by somebody, right? Haha 

Okay, back to the acquisition. Scientex Berhad announced at thurs that the group is going to acquire the entire equity interest in Seacera Polyfilms and the total purchase consideration amount is RM40.0m. A quick check on the latest annual report of Seacera group found that Seacera group has 3 business segments which is tiles, plastic packaging and property division. 

Seacera Polymer manufactures highly technological products known as BOPP films used for item requires great barrier from water and oxygen which highly used in F&B industry. Based on the annual report of Seacera of year 2012, the chairman stated that the production lines were fully utilised and also implement some cost reduction programme which resulted in lower operation cost compared to previous year. In addition, the chairman also stated that the group was installing additional manufacturing line and the progress is still on-going. Scientex probably will keep the expansion going after the acquisition. 

Seacera group's business segments result (Annual report 2012)
Seacera Polymer packaging recorded a net profit of RM2.8m in year 2012 with a net profit margin of 6.2 which similar to Scientex plastic manufacturing segment. Based on the acquisition price of RM40.0m, it implies a PE of around 14.3. The PE Scientex offered is similar to the offer of GW Plastic acquisition earlier. But Seacera Polymer is way far smaller compared to GW Plastic. So I think the offer price is little bit high, probably Scientex want to make it fast without giving second thought by the Seacera's shareholders :).

Scientex plastic manufacturing segment recorded a operation profit of RM56.9m in year FY2013. So the profit contribution from Seacera Polymer to Scientex in future is quite small consider Scientex overall net profit is RM112m in FY2013, perhaps around 2-3%. Unless Scientex give it a go to further expand its manufacturing line to increase the production output in future. 

Based on the announcement, the proposed acquisition is by internally generated fund. Even with borrowings, it will increase Scientex net gearing ratio from 0.28 to 0.35. 

As at 31/7/2013 balance sheet, 

RM152m (cash) - RM335m ( borrowings ) - RM40m (addition borrowings for Seacera acquisitions) = -RM223. 

So, net gearing is RM223m/628.6m = 0.35.

The net gearing consider okay as the management indicate the comfortable level is between 0.25-0.5x. 

Furthermore, with a net operating cashflow of RM209m recorded at the end of FY2013, Scientex will have no problem to settle the net borrowings of RM223 with probably 1 year plus. 

Coupled with this acquisition with the RM50m capex spent on new 5 renowned blown film lines in GW Plastic which announced earlier, Scientex should able to record better profit in FY2014 along with the usual good contribution from the property segment which focus on building affordable houses in Iskandar region. 

Scientex contributed around 25% of my portfolio and I see no reason to sell it by now. Let my portfolio grows along with Scientex expansion plan. 

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