GW Plastics (“GWP”) and Scientex Berhad (“SB”), which were suspended
last Friday, have concurrently announced that GWP had proposed to dispose both
of its operating companies to SB for a total cash consideration of RM283.2m. We
see the deal positively as we believe it will benefit both companies’ shareholders
and recommend that GWP’s shareholders to
approve the sale (which will possibly see a special repayment back to them at RM1.19/share
and the delisting of the company thereafter). Trading on both stocks will
resume today. We are raising our TP on GWP from RM0.92 to RM1.19, which is also
the estimated cash per share to be distributed after completion of the disposal
to SB, implying a PER of 11x.
100% cash
repayment!!! GWP’s shareholders are likely to benefit from the sale and
cash repayment, especially since there has been relatively low traded volume on
the stock since its listing. The company will realise a gain of RM134.9m after
deducting the investment cost of the two subsidiaries of RM146.3m and an
estimated RM2.0m for the expenses for the proposal. Once completed, GWP will be an empty shell
with an approximately total cash of
RM281.4m, of which it has the intention to
distribute back to the shareholders. Based on the calculation as shown
on Table 1, assuming the company returns 100% of the cash to shareholders, we
estimate a total cash distribution of RM1.19 per share, which represents a
56.6% upside from its previous IPO price.
Win-win game! We
believe the deal will likely go through as we see it as a win-win game for both
GWP and SB shareholders. The former will be able to realise their investments
in GWP with an attractive premium while the latter will benefit from a stronger
earnings after consolidating the earnings from GWPI and GWPSB into SB. This
should lead to SB shareholders potentially receiving a higher dividend yield as
well as enjoying a higher ROE. Besides, we also foresee synergy within the
company as the acquisition will help it to increase its market share and the
capacity of its manufacturing arm thus improving its competitive advantages as
well as operational efficiencies. Hence, we believe the minority shareholders
of both companies are likely to approve the deal. Nevertheless, there is still
a small risk of the deal not going through as it is still subject to the
approvals of several parties and authorities.
What’s the next
highlight? In the meantime, we reckon SB is somewhat undervalued as the
stock is currently trading below the average industry forward PER of 7.9x, at
6.2x. Given the acquisition of the two subsidiaries of GWP, we believe SB will
potentially be re-rated on the back of
1) a 50:50 net profit composition (currently 60:40) of its property and
manufacturing segments with manufacturing likely getting a better valuation
over small capitalisation property stocks (refer to table 2&3) 2) higher
positive future prospects due to its market leadership and 3) higher dividend
yield and ROE. We have done a trailing twelve month (“T-12m”) proforma consolidated
earnings for SB after the completion of the acquisition as shown in table 4.
Despite lower margins, its T-12m EPS jumped by 16% to 42.2 sen. By applying the
current PER of 6.7x to the adjusted EPS, the stock’s fair value can easily be
priced at RM2.84, which is a 15.9% upside from the current share price of
RM2.45. Thus, we urge investors to take a re-look at SB. We may also initiate coverage on SB upon the
completion of the above deal.
Source: Kenanga
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