Scientex upgraded to ‘market perform’

PETALING JAYA: Kenanga Research has upgraded Scientex Bhd to “market perform” from “underperform” with a higher target price of RM8.50 from RM7.80, after the company announced the acquisition of a 42.41% stake in Daibochi Bhd.

This also comes upon rolling forward its valuations to FY20 from FY19 to better encapsulate the full-year impact to increased earnings as well as dilution from the acquisition of Daibochi Bhd stake.

“We are comfortable with our ‘market perform’ call post accounting for foreseeable upsides, although we may review our valuation basis again pending further confirmation of the longer-term synergies and potential mandatory take over if the deal goes through,” it said in a research note today.

Shares of Scientex soared as much as 33 sen or 3.8% to RM9. At close market, the stock was up 17 sen or 2% to RM8.84. Daibochi’s , however, fell 29 or 14.6% to close at RM1.70.

Kenanga Research maintained Scientex FY19 core net profit forecast, but increased FY20 core net profit by 5% to RM349 million upon it acquiring 42.4% of Daibochi.

“However, impact to FY20 EPS (earnings per share) is neutral, unchanged at 65.2 sen, due to dilution from potential issuance of 25.3 million new shares.”

Despite the acquisition, Kenanga does not expect any significant changes to Scientex earnings profile, which is mostly driven by the property segment.

Earnings before interest and taxes (ebit) margin for the property segment is 33%, while only 7% for the manufacturing segment.

For comparison purposes, Daibochi’s manufacturing ebit margin is about 7% to 8%, but at a 42.4% stake, nine-month annualised ebit only makes up 3% of Scientex FY20 ebit, which is not overly significant.

While the acquisition pricing is on the higher end, Kenanga Research opined that it is neutral to Scientex earnings.

It believes the steeper pricing is due to Daibochi having strong customers of multi-national companies.

“We were surprised (about the acquisition) but fairly positive as a take over of Daibochi would be synergistic in the longer run as both companies operate in different ends of the manufacturing spectrum.”

Meanwhile, MIDF Research has put Daibochi “under review” pending more details of the latest corporate exercise.

It cut Daibochi’s net profit forecasts by 16% and 16.6% to RM23.1 million and RM25.7 million for FY18 and FY19, to reflect the weaker-than-expected performance from Myanmar and slower than expected recovery in profit margin.

Source: The Sun Daily

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