SCGM’s expansion plans well on track

KUCHING: SCGM Bhd’s (SCGM) expansion plans are well on track, analysts observe but they remain neutral on the group’s long-term outlook.

Following SCGM’s first quarter of 2018 (1Q18) analysts’ briefing, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) highlighted that SCGM’s newly rented factory in Klang Valley is coming on-stream in September 2017 with one thermoform machine thus far.

Kenanga Research expected four more thermoform machines and two extruders by the second half of 2018 (2H18), adding 5,000 metric tonnes (MT) per year of capacity.

“This new plant will produce lunch boxes and shorten delivery time to the Klang Valley and Northern peninsular markets,” the research arm said.

“Additionally, construction of the second factory in Kulai, Johor is also well on track, and is currently 65 per cent completed while the timeline or completion is still by December 2018 (FY19).”

It noted that once completed, the new factory will bring total group capacity to 67,600 MT per year -- up 88 per cent from current levels.

According to Kenanga Research, SCGM was the silver sponsor for the 2017 South East Asian Games as well as the Asean Para games in Kuala Lumpur in 3Q of current year 2017 (CY17), which should bode well for sales of disposable lunch boxes and cups.

In line with the group’s longerterm expansion plans for a new plant targeted for completion in December 2018 (FY19) in Kulai, boosting production capacity to 67,600 MT per year, Kenanga Research expected FY18E and FY19E capital expenditure (capex) of RM60 million and RM54 million, respectively.

The research arm expected FY18E capex to be utilised for the second factory construction in Kulai and the new Klang Valley rented factory, while FY19E capex of RM54 million will be utilised for the Kulai factory construction.

“All in, we expect FY18- 19E effective tax rates of 13-18 per cent as SCGM will benefit from reinvestment tax allowance,” it said.

Accounting for weaker margins this quarter, Kenanga Research lowered its core net profit (CNP) margins to 12.2 to 12.2 per cent, from 13.6 to 13.3 per cent previously.

Kenanga Research explained that this was due to increased resin cost by 30 per cent year on year (y-o-y), higher other expenses such as utilities and staff cost from the newly rented plant in Klang Valley and slightly lower product margins as the sales mix encompasses more penetrative pricing which the research arm expected to persist for the next two years.