Thermoform food packaging manufacturer eyes new growth areas
SCGM Bhd is unperturbed by the recent speed bump that was experienced in its bottom line performance.
The slight dent in its second-quarter net profit due to higher cost of resin had helped tame expectations for the company to a more realistic level today.
The food packaging manufacturer’s shares saw a fall of some 21.4% from its historical high of RM3.33 that was reached back in July this year.
Dealers say some selling had happened from July soon after SCGM’s shareholders approved a bonus issuance and warrants, which had in turn increased its issued and paid-up capital from 145.20 million shares to 212.96 million.
Its fully diluted historical price-to-earnings ratio (PER) now stands at 19.77 times while the fully diluted forward financial year ending April 30, 2018 (FY18) PER is at 18.71 times.
“Resin is our primary input, making up about 65% of our production costs. The year-on-year (y-o-y) net profit drop in the second quarter of FY18 was due to higher resin prices, which in turn was dictated by global supply-demand conditions,” managing director Datuk Seri Lee Hock Chai tells StarBizWeek.
He says resin prices have risen by about 10% y-o-y in the second quarter compared to a year ago.
Net profit in its second quarter had fallen by 3.12% y-o-y to RM5.26mil but earnings per share fell by a larger degree of 33.33% to 2.74 sen on the dilution impact of its recent corporate exercises.
Revenue, however, rose to RM52.11mil from RM42.02mil in the respective period due to higher demand for its products.
The company uses a wide range of resin types, including polypropylene and polyethylene terephthalate to make its products.
While margins are challenged today due to cost factors, Lee says a cost-push action to raise end prices in a bid to preserve margins is not being considered at the moment.
“We take customer rapport very seriously; this is how we have managed to not just survive but thrive in a competitive world.
“In light of this, we do not simply increase prices merely to improve margins; rather, any price increases are carefully evaluated and justified by price hikes in costs beyond our control, such as resin costs,” he says.
“We also constantly invest into newer technology that enables us to enhance our production efficiency,” Lee adds.
The company is now focusing on expanding its production capacity through the establishment of more factories.
The Johor-based company had recently set up its first manufacturing facility in the Klang Valley to capture more market share in the central region of Peninsular Malaysia.
The 47,000-sq-ft factory costs some RM20mil in capital expenditures and houses four thermoform machines and two extruders. It has a production capacity of 5 million kg and had recently started operations.
“Our existing Kulai plant, together with the rented premises in Kulai and Klang Valley, have an extrusion capacity of 41 million kg per year,” Lee says.
It is also in the midst of expanding another plant in Kulai that will be commissioned by the end of the next calendar year.
“Upon the commissioning of the new Kulai plant, our total extrusion capacity will increase by about 65% to 67.6 million kg per year,” he says.
Lee says with the rising awareness to preserve the environment, demand is expected to grow especially in the segment of environment-friendly plastic products.
“Anyone who is able to provide environment-friendly biodegradable plastic products is envisaged to be able to grow their market share rapidly due to a potential change in regulations for food packaging in even more states in Malaysia,” he says.
With its several expansion activities that are being executed presently, SCGM seems to be placing its bets that this will happen sooner than later.
“Currently, only a few states have implemented the ban on polystyrene food and beverage (F&B) packaging in various stages, such as the Klang Valley, Penang and Melaka. This trend can only expand to other states, with Johor and Perak on the verge of enforcing the ban,” Lee says.
“We do believe that thermoform packaging like what is produced by us will continue to be a beneficiary of this regulation,” he adds.
On environment-friendly biodegradable plastics, SCGM sees “very exciting” prospects in this segment.
Lee notes that demand has indeed picked up in the country and in the wider Asian region from greater environmental awareness and earth-friendly conservation efforts.
Analysts say demand will come from the F&B industry, which uses a lot of packaging in line with changing and more affluent lifestyles.
They say that products could expand to include other innovative ranges such as biodegradable straws or even plates to cater for the requirements of the F&B industry.
“We intend to increase our product range in the coming years. At present, we have only started producing biodegradeable lunchboxes, and aim to add on more items like bowls, plates and other common F&B-related items from next year,” Lee says.
He adds that environment-friendly products is a differentiating factor against other companies.
Demand from biodegradable plastic packaging products will come from higher income users who have higher hygiene standards, he says.
“The population is also increasingly mobile and need more convenient packaging. For example, in the past, thermoform lunchboxes were the only portable semi-rigid packaging.
“Today, thermoform is used for bento, soups, egg trays and a host of other items, replacing paper-based or glass packaging because of hygiene, cost and sustainability,” Lee adds.
With the rising awareness of the need to preserve the environment and the changes in lifestyles, SCGM seems well-placed to tap into this growing trend.