This article first appeared in The Edge Financial Daily on September 24, 2018

SCGM Bhd
(Sept 21, RM1.37)
Maintain neutral with a lower target price (TP) of RM1.39: SCGM Bhd’s group sales rose 4.1% year-on-year (y-o-y) to RM55.8 million in the first quarter of its financial year 2019 (1QFY19) on the back of stronger plastic packaging product demand from both local (+5.5% y-o-y) and export (+1%) markets. Despite the positive growth, it is significantly lower compared with the double-digit sales growth that it used to achieve.

Stripping out exceptional items, the group’s core earnings tumbled to a paltry RM1.1 million, a massive drop of 81% y-o-y. Apart from slower sales growth, the poor results were also dragged down by an increase in resin prices, finance costs, depreciation, labour cost and foreign exchange losses. Gross earnings margin weakened from 13% in 1QFY18 to a thin 4.8%, which we attribute to a substantial increase in resin cost that makes up about 60% to 70% of total production cost.

The new Kulai plant, which will enhance its extrusion capacity by 65% from 41 million kg/year to 67.6 million kg/year, is expected to be operational by December 2018. The larger capacity will come in timely for the group as it plans to target new export markets, namely Cambodia and Myanmar as well as increased sales in existing overseas markets such as Indonesia, Australia and New Zealand. Quoting a recent interview with Sin Chew Daily, management said that it has no intention of getting into price wars with its competitors on lunch box sales.

On the new plant, it will house 31 thermoforming machines and 15 extrusion machines (the number of workers will remain at 500). After completing the migration process, the group plans to dispose of the old plant in Kulai, which has a net book value of RM17.8 million. Lastly, management is in the midst of applying for tax incentives as close to 40% of its raw materials are derived from recycled sources. — PublicInvest Research, Sept 21