7 things I learned from the 2019 Scientex EGM

Scientex Berhad is a flexible plastic packaging (FPP) manufacturer and an affordable home developer. It was incorporated in 1968 and listed on Bursa Malaysia in 1990. Its manufacturing facilities span across Malaysia, Vietnam, and the United States. In 2018, it celebrated its 50th anniversary and launched a new Vision 2028 which aims to increase its FPP production output to 1,000,00 metric tonnes as well as build 50,000 affordable homes by 2028.

In November 2018, Scientex announced a proposed acquisition to purchase a stake in Daibochi – a player in the FPP industry. Scientex is no stranger to acquisitions and fully acquired Klang Hock Plastic Industries in May 2018. The proposed acquisition sparked my interest in Scientex. I decided to attend its extraordinary general meeting to know more about the company.

Here are seven things I learned from the 2019 Scientex EGM:

1. Scientex intends to buy a 42.4% stake — equivalent to 139.1 million ordinary shares — in Daibochi at RM222.5 million via a share swap. After taking into consideration of the distribution of Daibochi’s interim dividend at RM0.01 per share in December 2018,one new Scientex ordinary share at RM8.80 will be issued in exchange for every 5.535 Daibochi shares purchased at RM1.59 each. The proposed acquisition was put forward and voted for by shareholders during the 2019 EGM.

2. Upon completion of the proposed acquisition, a mandatory takeover offer will be triggered to acquire the remaining shares and warrants in Daibochi. The shares can be settled either via cash or issuance of new Scientex shares at the exchange ratio of 5.535 mentioned above whereas each of the remaining warrants will be offered at RM0.01 via cash. Scientex will rely on internally generated cash and/or bank borrowings to fund the offer that is targeted to be completed by the end of March 2019.

3. The purchase consideration of Daibochi shares at RM1.60 represents a price-to-earnings (P/E) ratio of 20.0 times and a price-to-book (P/B) ratio of 2.6 times. Minority Shareholder Watch Group (MSWG) pointed out that the valuation was slightly higher than the industry average P/E and P/B of 17.8 and 1.6 respectively. The management explained that the valuation takes into account the synergistic growth of Scientex and Daibochi in new and emerging markets such as Myanmar as well as greater access to Daibochi’s international clientele.

4. MSWG asked how the Daibochi acquisition would help Scientex provide greater differentiation in terms of products and better serve customers. The management replied that most global brand owners are more environmentally conscious and have set targets to use fully recyclable packaging materials by 2025. By combining Scientex’s experience in upstream plastic film production as well as Daibochi’s downstream plastic-converting expertise with brand owners, they can differentiate themselves among their competitors by producing fully recyclable monopolymer-based laminated products and cater to customer needs better.

5. A shareholder asked about Scientex’s rationale of acquiring Daibochi to enter Myanmar market instead of venturing into the market on its own as well as the market outlook there. The managing director mentioned that Scientex currently exports small amounts of products to Myanmar and faces challenges in payment issues. On the other hand, Daibochi has been actively expanding its businesses in Myanmar. Scientex wants to leverage on Daibochi’s plants to accelerate its business expansion in Myanmar over the next few years. The chairman added that Scientex and Daibochi would complement each other in upstream and downstream packaging activities to produce more environmentally friendly products. Scientex manufactures plastic films whereas Daibochi performs printing and lamination work and converts the films into final products. Both companies will leverage on each other’s strength in their respective areas. The managing director said that Myanmar is a fast-growing market with a population of 50 million and plenty of opportunities. The Myanmar expansion had always been planned and it is relatively cheap to operate in Myanmar. By expanding into Myanmar, Scientex can also tap into surrounding countries such as Thailand.

6. A shareholder asked if there would be changes to Scientex and Daibochi including the board of directors and financial reporting practices. In general, the management viewed the acquisition as synergistic and complementary. The managing director mentioned that they would send board nominations to Daibochi after the mandatory takeover offer is completed. Changes to the top-line and bottom-line will depend on the amount of Scientex’s share ownership in Daibochi. The management of Daibochi will also be retained as the managing director believes in mutual growth and harnessing each other’s potential. At the same time, the managing director did not reveal whether Daibochi would remain as a separate listed entity.

7. The same shareholder was also interested in knowing if Scientex would acquire more plastic downstream players in the future. The managing director replied that Scientex would continue to conduct mergers and acquisitions in Malaysia and abroad in conjunction with Scientex’s Vision 2028. The management will remain prudent by focusing 30% of its efforts on business growth and the rest on acquisitions. Scientex will also not load too much debt and a gearing ratio of below 0.5 will be maintained.

Read more about Scientex: 15 things to know about Scientex before you invest

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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