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This article first appeared in The Edge Malaysia Weekly on April 15, 2019 - April 21, 2019

IT has been a challenging 12 months for thermoform food packaging manufacturer SCGM Bhd. Amid the challenges of relocating to a new facility in Kulai, Johor, it had also to grapple with rising raw material and transition costs.

Analysts have not been sanguine about its prospects with neither of the two investment banks covering the stock — Kenanga Investment Bank and Public Investment Bank — prepared to make a “buy” call on it.

Year to date, SCGM’s share price has declined 14% to close last Thursday at RM1.01, its lowest in four years.

SCGM is in need of a good turnaround story, which the group believes lies in forging partnerships with local players in Southeast Asia to expand its exports, which accounted for 34.4% of revenue last year.

In applying that strategy, Indonesia, a nation of 264 million, has emerged as a natural first choice for the group to market its degradable products, given Indonesia’s desire to combat its huge plastic waste problem by switching to more environment-friendly products.

As SCGM’s thermoform plastic packaging products are microwaveable and degradable, and will decompose after five years, they are an environment-friendly choice for food packaging.

To kick things off, SCGM’s wholly-owned subsidiary, Lee Soon Seng Plastic Industries Sdn Bhd, inked a memorandum of agreement with Indonesian distributor PT Harapan Infiniti Mulia to exclusively manufacture degradable packaging for the Indonesian market. Under the terms of the agreement, SCGM will manufacture products for PT Harapan’s ecorasa brand, with projected sales of US$2.1 million over a two-year period.

“[Expansion of overseas markets] is part of our long-term business strategy as we engage more experienced local distributors to help us market our products because we [may] not understand the business culture of the countries that we operate in. For Indonesia, having a local partner has [come in handy] for us to penetrate the market there,” SCGM executive chairman Datuk Seri Lee Hock Seng tells The Edge in an interview.

An Indonesian start-up, PT Harapan commands a market share that includes customers such as Kulina, an online catering company, and Cinema 21, the largest cinema chain in the country.

The company is the exclusive distributor of ecorasa degradable packaging in Indonesia, which includes thermoform lunch boxes, bowls, plates and trays.

“We will start with this range of products before venturing into others such as disposable cups. Cups are a whole different market altogether, so we will need some time to conduct a feasibility study to understand which [customer] segment to tap into,” says SCGM managing director Datuk Seri Lee Hock Chai, who is also Hock Seng’s brother.

The ecorasa products will be made at SCGM’s new plant in Kulai, which commenced operations six months ago. The technology for the products, called Oxium, is provided by PT Harapan.

Prior to the commissioning of the Kulai facility, SCGM’s utilisation rate of its old Kulai and Banting plants was close to 90%. But with the new plant, the rate has dropped to around 50%.

Nevertheless, the group is confident that new orders will ramp up utilisation.

Based on its historical trend, the group has been delivering double-digit revenue growth in the past three financial years. For the financial year ended April 30, 2018 (FY2018), revenue grew 16% to RM207.42 million. Net profit, however, fell 29% to RM16.4 million.

For its latest financial period ended Jan 31, 2019 (9MFY2019), revenue grew only 6% to RM168.87 million while net profit plunged 88% to RM2.02 million.

“We had the transition costs due to the move to the new plant in FY2019. The moving costs associated with the new plant dragged down our [financial] performance as there were delays to production. Apart from that, higher resin prices, which make up 60% of our costs, also played a part.

“However, we are optimistic about our prospects in FY2020,” says Hock Chai.

 

Consolidation in the plastic and packaging industry

Consolidation has been a recent feature in the plastic and packaging industry with Scientex Bhd making a mandatory general offer for the shares it does not own in its former rival, Daibochi Bhd. Scientex now controls 61.9% of Daibochi.

A relatively modest market capitalistion of some RM200 million makes SCGM one of the smaller players in the sector and a probable acquisition target.

SCGM’s strong family dynamics are worth noting. The company is controlled by four brothers — Hock Seng, Hock Chai, deputy managing director Datuk Seri Lee Hock Guan and executive director Lee Hock Meng. A succession plan is already in place as the children of Hock Seng and Hock Guan are working in the company.

However, Hock Seng maintains that the group does not have a “keeping it in the family” mentality and will be open to potential mergers and acquisitions.

“We are always open to collaborations and joint ventures to bring the company to the next level, and there have been offers made by interested parties. If the offer is good for the company and for our shareholders, then why not? However, nothing is on the table yet,” he says.

In SCGM’s corporate video posted in 2016, Hock Seng observes, “Your past accomplishments do not last forever, therefore, you must make everything count. What was yesterday is yesterday’s, tomorrow is your next success story.”

If SCGM can make its Indonesian collaboration count, it will be the new success story investors have been waiting for.

 

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