SCGM BHD
By Kenanga Research Market perform Target price: RM3.05 SCGM’s first quarter FY18 saw margin compression on higher cost of raw materials, higher expenses and changes in the sales mix.
Expansion plans are well on track with the rented factory in Klang Valley coming on-stream in September 2017 with one thermoform machine.
Kenanga Research expects four more ther- moform machines and two extruders by the second half of 2018, adding capacity of 5,000 tonnes per year.
The new plant will produce lunch boxes and shorten delivery time to the Klang Valley and northern peninsula markets.
Additionally, construction of the second factory in Kulai, Johor is also on track, to be completed by December 2018 (FY19).
Once completed, the new factory will bring total group capacity to 67,600 tonnes per year (+88% from current levels).
SCGM was the silver sponsor for the 2017 South-East Asian Games as well as the Asean Para games in Kuala Lumpur, which should bode well for sales of disposable lunch boxes and cups.
In line with the group’s longer-term expansion plans for the new plant, the research house is expecting FY18 to FY19 capex of RM60mil to RM54mil, with FY18 capex to be utilised for the second factory construction in Kulai, and the Klang Valley rented factory, while FY19 capex of RM54mil will be utilised for the Kulai factory construction.
“All in, we expect FY18 to FY19 effective tax rates of 13%-18% as SCGM will benefit from reinvestment tax allowance.
“We lower FY18 to FY19 earnings by 10% to 8%, to RM27.7mil to RM35.1mil on lower margin assumptions.
“Accounting for weaker margins this quarter, we have lowered our core net profit margins to 12.2% (from 13.6% to 13.3%) due to increased resin cost by 30% year-on-year, higher 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 we expect to persist for the next two years,” said Kenanga Research.
The research house maintains its “market perform” call as most downsides have already been priced in, while the group’s longer-term prospects are intact in light of decent earnings growth from long-term extrusion capacity expansion, and food and beverage container market opening up on state-wide polystyrene container ban.