This article first appeared in The Edge Financial Daily on December 11, 2017

SCGM Bhd
(Dec 8, RM2.65)
Remain outperform with a lower target price of RM3.02: SCGM registered core earnings of RM10.8 million for first half of financial year 2018 (1HFY18), down 1.8% year-on-year (y-o-y). Earnings were dragged down mainly by higher operating expenses, up 36.5% y-o-y, which outpaced a 32.2% increase in sales. The results made up only 42% of our and consensus forecasts.

Despite weaker-than-expected results, we maintain our earnings forecasts as we see a seasonal pick-up in 2H. A dividend per share of 1.5 sen (versus two sen in second quarter (2QFY17) was declared for the quarter.

The group registered strong growth to RM52.1 million, up 24% y-o-y in 2QFY18 on the back of better plastic packaging product sales from local demand (+3.2% y-o-y) while the export sales market also grew (+14.9%).

Local sales made up 62% during the quarter compared with 59.5% in 2QFY17. Thermoform lunchbox sales generated about RM6.3 million (1QFY18: RM6.8 million), helped by increased awareness of the regulatory ban on the use of polystyrene as food packaging.

Stripping out the exceptional items, the group’s core earnings stood at RM5.1 million in 2QFY18, mainly supported by improved sales from its plastic packaging products, which were dragged down by higher material costs.

Gross earnings margin further declined from 15.2% in 2QFY17 to 11.9%, weighed by a substantial 36.5% increase in operating expenses which was mainly due to an increase in resin cost.

We like the company for its i) recession-proof business, ii) substantial capacity expansion in the pipeline and iii) double-digit growth in the biodegradable plastic packaging products for the next few years. — Public Investment Bank Research, Dec 8