This article first appeared in The Edge Financial Daily on December 18, 2018

SCGM Bhd
(Dec 17, RM1.05)
Maintain neutral with an unchanged target price of RM1.39: We understand that there is a one-month delay in the plant migration timeline and it now targets to completely move in by end-January 2019.

As of now, about 65% of the machineries from the old plant have been moved into the new Kulai plant, which will house 13 units of extrusion machines and 29 units of thermoforming machines with a total extrusion capacity of 62.6m kg/year (up from 36m kg/year).

It is worth noting that the company has started recognising depreciation expenses from the new plant as it has already commenced operations, albeit on a small scale. This resulted in a quarterly increase of RM1 million year-on-year (y-o-y) in depreciation expenses since the first financial quarter ended July 31, 2018 (1QFY19).

Meanwhile, the lunchbox and cup segment, which made up 18% of group sales, saw more competitive pricing as the result of an influx of new players.

The company scaled down cup production in 2QFY19 as it was not commercially viable compared with the normal 3% earnings margin it made previously.

Nevertheless, it still registered a decent growth of 7% in 2QFY19 sales (-4.2% y-o-y for the first half of FY19).

Separately, resin prices, which made up 65% of the total operating cost, have finally seen a slide after hitting a peak in August as oil prices have tumbled more than 30% since October.

The composition of its resin application is made up of polypropylene (50%), polyethylene terephthalate (40%) and polystyrene (10%).

On a more positive side, the company has no hedging policy for its resin materials, which will see savings in resin cost in the near term, though there is a lagging effect of two months. We expect to see a significant drop in material cost by 4QFY19.

The group’s management is interested in expanding its export segment, which currently makes up 33% of its sales. Despite the overseas margins being lower, orders are huge and more consistent compared with the local market.

In line with the new government’s aim of reducing plastic use to be more environmental-friendly, the company is pushing for biodegradable products by collaborating with the US and Indonesian partners for research and development, which is expected to take six to nine months.

Reinvestment allowances, which can offset up to 70% of taxable income, have not yet kicked in despite the commencement of operations of its new plant as current earnings are still not favourable. — PublicInvest Research, Dec 17