SCGM‘s 9MFY18 below expectations
KUALA LUMPUR: Plastic food packaging manufacturer SCGM Bhd’s (SCGM) third quarter financial year 2018 (3QFY18) results are out and cumulatively, the group’s core earnings for the first nine months of FY18 (9MFY18) have come in below expectations.
In a results note, Kenanga Investment Bank Bhd (Kenanga Research) pointed out that the group’s 9MFY18 core net profit (CNP) of RM16.1 million is below their expectations at only 66 per cent – marking the fourth consecutive quarter of missed results from SCGM.
The disappointing CNP occurred despite a top-line growth of 26 year over year (y-o-y) and 3 per cent quarter over quarter (q-oq) on the back of improved demand from the local market for lunch boxes and plastic cups.
Kenanga Research attributed the missed results to a weakerthan-expected earnings before interest and tax (EBIT) margin of 12.2 per cent as compared to their forecasted margin of 13 per cent.
“This was likely due to higherthan-expected raw material cost from resin and less than favourable sales mix.
“Although EBIT margin declined on higher resin cost, the negative impact to the group’s bottom-line was cushioned by lower effective tax rates of 0.9 per cent versus 13.7 per cent seen in 2QFY18,” explained the research arm.
Looking forward, the group’s long-term expansion plans for a new plant in Kulai are expected to be completed in December 2018.
Once completed, the group’s production capacity will be boosted to 67,600 MT per annum, which will lend support to increased earnings.
Additionally, the research arm is also expecting FY18-19 effective tax rates to stay low at around 13 to 18 per cent.
Nevertheless, Kenanga Research guides that they remain concerned over the constant margin compressions seen in previous quarters and as such, have decided to lower their FY19-19E EBIT margins to a conservative 11.8 and 12.0 per cent, and subsequently, their FY18-19E CNP by 9 an 27 per cent to RM22 and 23 million.
Kenanga Research maintains its ‘market Perform’ call on SCGM with a lower target price of RM2.00 from RM2.65.
“Our applied price earnings ratio (PER) of 18.5x is lower than SLP Resources Bhd’s forward PER of 18.7 times due to SCGM’s weaker margins and earnings growth post trimming our earnings, but above Tomypak Holdings Bhd’s PER of 18.3x.