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This article first appeared in The Edge Financial Daily, on November 19, 2015.

 

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SCGM Bhd

MOST, if not all, plastic packaging stocks have outperformed the market so far this year, benefiting from lower raw material prices and the strengthening USD. These stocks have risen by an average of 82% year-to-date, compared to a decline of 5.7% for the KLCI.

Valuations appear high with average P/E of 18 times for the industry. Nevertheless, some stocks are still attractive, especially those that cater to the food & beverage (F&B) sector.

Among the listed packaging players, we like SCGM (Fundamental: 2.6/3, Valuation: 1.7/3) for its defensive earnings with growth potential, plus decent yield of 3.1%.

Furthermore, export-oriented companies like SCGM will continue to do well, due mainly to the stronger USD and lower commodity prices. Low oil prices translate into lower resin raw material costs for SCGM.

Export accounts for about half of its sales, rising at a CAGR of 17.6% from FYApril2009-FY2014. The company will continue to expand its export markets as well as introduce new products such as airtight and watertight containers.

To recap, Johor-based SCGM manufactures thermo-vacuum formed plastic packaging, comprising mainly disposable plastic trays and containers for the F&B, electronics & electrical and medical sectors. More importantly, it derives about 75% of its sales from the resilient F&B industry.

For 1QFY2016, sales grew 8.7% y-y to RM29.6 million while net profit jumped an outsized 37.9% to RM4.9 million, boosted by lower raw material costs and foreign exchange gains.

Despite chalking a whopping 134.4% gain since we first recommended the stock back in January, we remain bullish on its outlook. Its new plastic cup line has started production and is expected to boost sales by 20% in FY2016. Therefore, its trailing P/E of 20 times should compress fairly quickly with double-digit earnings growth.

Going forward, it plans to invest RM22 million to expand production capacity by 34%. Funding should not be an issue as it has proposed a private placement to raise around RM33.6 million.

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