This article first appeared in The Edge Financial Daily, on August 12, 2016.

SCGM Bhd
(Aug 11, RM3.53)
Maintain outperform with an unchanged target price of RM4: SCGM Bhd announced on Wednesday that it is planning to undertake another 10% private placement of its shares, which would increase its share capital from 132 million to 145.2 million shares of 50 sen each. The shares will be allocated to third-party institutional investors, who will be identified at a later date. We are leaving our forecasts unchanged for the time being, pending completion of the placement within the next four months.

The indicative price of the placement shares is yet to be known. However, it is expected to be priced based on a discount of no more than 10% to the five-day weighted market average market price of SCGM shares immediately before the price-fixing date. Assuming an indicative issue price of RM3.50 per share, SCGM’s placement is expected to raise RM46.2 million. As the company completed a private placement with the issuance of 12 million new shares in December 2015, less than 12 months from the current proposed private placement, it will require shareholders’ approval in the upcoming extraordinary general meeting.

Almost all the proceeds from the placement will be used to partly finance the construction of a new plant in Kulai, which is expected to take off in December 2016. The cost of the construction of the proposed new plant on a 7.8ha land is about RM80 million and is scheduled to be completed by end-2018. It will include a three-storey office, a two-storey factory, a two-storey warehouse and an ancillary building. Under the five-year expansion plan, the group plans to install eight units of thermoforming machines, four units of extrusion machines and a cup machine at the new plant, which will expand its extrusion production capacity from 16.8 million kg per year to 62.6 million kg per year, a staggering growth of 272%.

The proposed placement is expected to have a dilutive effect on SCGM’s numbers. Based on the enlarged share capital of 145.2 million shares, our forecast financial year 2017 earnings per share will be diluted by approximately 10% to 14.9 sen from 16.5 sen. However, we are leaving our estimates unchanged at this juncture. — PublicInvest Research, Aug 11