PublicInvest Research retains Outperform for SCGM

KUALA LUMPUR: PublicInvest Research is retaining its Outperform call on SCGM, which is Malaysia’s leading thermo-vacuum form plastic packaging manufacturer, with a target price of RM4.

The research house said on Thursday the recent recovery in oil prices could affect its resin cost, which is mainly derived from petrochemicals. 

“Nevertheless, we believe the company can pass on additional input costs to customers given its strong market share (more than 60%) in the industry. We like the company for its i) recession-proof business, ii) substantial capacity expansion in the pipeline and iii) double-digit growth in the biodegradable plastic packaging products for the next few years,” it said. 

SCGM’s 9MFY17 earnings of RM17.8mil came in slightly above its and consensus expectations, making up 81% and 80% of full-year estimates respectively. 

PublicInvest Research maintained its earnings forecasts as 4Q was a seasonally weak quarter.

Commenting on the share price, it said SCGM had performed quite well this year, climbing more than 14% year-to-date,  outperforming the FBM Small Cap Index by 2%. 

“Pending further management guidance from the analyst briefing today, we maintain our Outperform call with an unchanged target price of RM4 based on 21 times FY18 EPS,” it said. 

SCGM's revenue rose 23% on-year to RM45.9mil in 3QFY17 on the back of better plastic packaging product sales from local demand (+46% on-year) while the exports market remained steady. 

Local sales made up 60% during the quarter compared to 51% in 3QFY16. 

Biodegradable lunch box is the key growth driver for the group as it contributed about RM10.3mil (2QFY17: RM2mil, 1QFY17: RM1.4mil). Growth is staggering considering the group only started rolling out the product in 4Q last year. 

Stripping out foreign exchange gains, the group’s core earnings jumped 17.6% on-year to RM6mil in 3QFY17, mainly driven by improved sales from its plastic packaging products. 

Gross earnings margin dipped from 21.8% to 13.9% however as operating expenses jumped 35.7% on-year attributed to an increase in resin cost, depreciation of property, plant and equipment, electricity cost and packaging materials. 

“Our channel checks showed that resin prices had generally risen more than 20% on-year during the quarter. 

“Management expects to see a pick-up in demand for its biodegradable lunch boxes following the ban on polystyrene in several states. Meanwhile, the upcoming 2017 South East Asian Games and Asean Paralympic Games, which will be held in September, and are expected to draw more demand for its disposable lunch boxes and cups,” said PublicInvest Research.