This article first appeared in The Edge Financial Daily on June 23, 2017

SCGM Bhd
(June 22, RM4.12)
Maintain outperform with an unchanged target price (TP) of RM4.26: SCGM Bhd registered core earnings of RM23 million for financial year 2017 (FY17), an increase of 15% year-on-year (y-o-y). The new level of record earnings was helped mainly by encouraging local sales of its food packaging products. The results were in line with our and consensus forecasts.

Sales from the extrusion, medical and “others” segment outperformed with a 74% y-o-y growth, spurred by additional production lines, while the food and beverage segment grew 12.4% y-o-y.

A fourth interim dividend of two sen was declared for the quarter. Pending further management guidance from the analyst briefing today, we maintain our “outperform” call with an unchanged TP of RM4.26 based on 21 times FY18 earnings per share.

The group registered an encouraging growth of 62.8% y-o-y to RM52.9 million in the fourth quarter of FY17 (4QFY17), on the back of better plastic packaging product sales on higher local demand (+89.5% y-o-y), while the export sales market also grew (+24.9%).

Local sales made up 68% of sales in the quarter, compared with 59% in 4QFY16. Thermoform lunchboxes were the key growth driver of the group as they contributed about RM8 million (3QFY17: RM10.3 million; 2QFY17: RM2 million; 1QFY17: RM1.4 million), helped by the enforcement of the ban of polystyrene food boxes in several states, namely Johor, Perak, Selangor, Melaka, Kuala Lumpur and Penang.

Stripping out foreign exchange gains, the group’s core earnings surged 50% y-o-y to RM5.1 million in 4QFY17. The gross earnings margin fell from 15.4% to 12.3%, however, as operating expenses jumped 68.7% y-o-y, attributed to an increase in resin cost, depreciation of property, plant and equipment, electricity cost and packaging materials.

Management put in a new line of degradable food packaging in June. It also introduced environmentally friendly degradable food packaging into the Malaysian market. Its “Benxon” brand of thermoform lunchboxes has started carrying the Eco-Label mark, which will make it a more competitive brand name in overseas markets.

We like the company for: i) its recession-proof business; ii) substantial capacity expansion in the pipeline; and iii) double-digit growth in biodegradable plastic packaging products for the next few years. — PublicInvest Research, June 22