KUALA LUMPUR: Kenanga Research maintained Market Perform on SCGM Bhd
but lowered its target price to RM2.75 from RM3 as the research firm turns cautious of its near-term earnings due to margin compression.
Kenanga said H118 results were below its expectations for the third consecutive quarter with core net profit margin at 10.4% versus its estimate of 12.1%.
The research firm believes the problem is due to higher-than-expected expenses and penetrative pricing affecting margins.
It added that SCGM's rented factory in the Klang Valley has been gradually coming on stream since 2Q18, with stronger contributions expected in coming quarters.
"stream since 2Q18, with stronger contributions expected in coming quarters. The factory has one thermoform and one extrusion machine for now, while we expect four more thermoform and
one extruder by 3Q18, adding a total of 5k MT/year of capacity," it said.
The construction of the second factory in Kulai, Johor, is well on track and 85% completed with completion expected for December 2018. The new factory will bring total group capacity to 67,600 metric tonnes per year, or 78% above current levels.
"We are expecting FY18-19E capex of RM60mil to 54mil, with FY18E capex to be utilised for; (i) the second factory construction in Kulai, and (ii) the new Klang Valley rented factory, while FY19 capex of RM54mil will be utilised for constructing its Kulai factory. We expect low effective tax rates of 13-18% for FY18-19 as SCGM will benefit from the reinvestment allowance."
Kenanga said the group's longer term prospects are intact in light of decent earnings growth from long-term extrusion capacity expansion and the F&B container market opening up on state-wide polystyrene container ban.
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