KUALA LUMPUR: The worst may be over for SCGM Bhd
despite a disappointing first half of FY19 that saw earnings tumble 75% year-on-year to RM2.6mil.
Over the period, the group's earnings came in at only 24% and 31% of PublicInvest research's and consensus expectations due to exponential growth in operating cost and a four-fold jump in finance cost from higher gearing.
"Stripping out exceptional items, the Group’s core earnings tumbled to a low of RM1.5m. The poor results were also dragged by an increase in i) resin prices, ii) finance costs, iii) depreciation, iv) labour cost and v) foreign exchange losses.
"Gross earnings margin dived from 12% to 5.2%, which we attribute to a substantial increase in resin cost that made up about 70% of total production cost," said PublicInvest.
However, the research house is expecting a sharp catch-up in the company's earnings for the second half of the financial year due to cheaper oil prices.
"Given the sharp decline in oil prices since Oct, down by more than 30%, we believe it would help ease the pressure on resin cost, which made up 70% of their operating cost.
"It is worth nothing that the company does not adopt a hedging policy for resin materials, indicating that it will fully benefit from the cheaper resin cost immediately," it said.
The research house added that full operations of the new factory will see extrusion capacity jump from 36m/kg to 62.6m/kg and bump up production volume and economies of scale.
"The transition of the group’s core operations from the old plant to the new headquarters in Kulai is currently underway and is targeted to be fully operational by 3QFY19," it said.
PublicInvest maintained its neutral call on the counter with an unchanged target price of RM1.39.
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