Kenanga downgrades SCGM to underperform on disappointing earnings

KUALA LUMPUR: Kenanga Research said SCGM Bhd's FY18 core earnings of RM15.4mil came in below expectations although its total dividend of 5.60 sen exceeded estimates.

"Top-line came in below (92% of our estimates) due to lower sales from domestic and overseas customers, while CNP margin was also weaker than expected at 7.4% vs. (8.5%) due to higher resin and labour costs."

It added that this marked a fifth consecutive quarter that SCGM had disappointed.

However, the total dividend of RM10.9mil or 5.60 sen was 124% of its FU18E diidend of 4.50 sen due to a lower payout assumption of 45%.

According to the research house, SCGM's longer-term expansion plan for a new plant in Kulai is targeted for completion in December 2018, boosting production capacity to 67.6 metric tonnes a year.

"We are expecting FY18-19 capex of RM60-54m, with FY18 capex to be utilised for; (i) the 2nd factory construction in Kulai, and (ii) the new Klang Valley rented factory, while
FY19 capex of RM54m will be utilised for constructing the Kulai factory.

"We expect low effective tax rates of 18-20% for FY19-20 as SCGM will benefit from reinvestment allowance."

Kenanga lowered its FY19E core net profit by 49% to RM10.8mil from RM21.1mil previously and introduced FY20E core net profit of RM15.1mil. 

It also downgraded the counter to underperform and lowered its target price to RM1.30 from RM1.45 previously.
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