PublicInvest Research

Author: PublicInvest   |   Latest post: Thu, 23 Jan 2020, 9:38 AM


SCGM Bhd - New Orders On The Way

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We came away from SCGM’s analyst briefing yesterday with more positive updates on the company’s outlook. We are confident that SGCM will do better in the subsequent quarters on the back of i) gradual decline in resin cost, which makes up of 60%-65% of the company’s production cost, ii) strategizing its product mix to focus on more high-margin plastic packaging products and iii) continuous focus on the capturing of more bulk orders to beef up its utilization rate from 60% to 70%. Maintain Trading Buy with an unchanged TP of RM1.82 based on multiple of 20x FY21 EPS.

  • Review of 2QFY20 results. Group sales fell 6.8% YoY to RM53.5m, dragged by a decline from the F&B (-7.6%) and others (-32.3%) segments while extrusion sales picked up 14.3% YoY, led by full commissioning of the 15 production lines. Lunch boxes, which accounted for 10% of group sales, saw a decline of 5-6% YoY in sales volume for 1HFY20. Since the completion of migration in April 2019, extrusion capacity has been running at 60%. Management has set a target of 70% by end-FY20. During the quarter, resin cost was significantly lower, down 6% QoQ and 20% YoY. Inventory level rose 16.8% compared to 1QFY20 as management stocked up more resin materials (up to 2 months) given the current favourable prices. It still has a total outstanding unutilized tax allowance of RM30.8m, which will see effective tax rates lowered to 15% for FY20-22.
  • Planning to relocate its Banting plant. As the Banting plant’s 3-year tenancy period is expiring by next year, management is planning to consolidate all production in the new Kulai plant in line with its intension of scaling down the low-margin lunch box products. We understand that lunch box margins are between 5% and 8% at the gross level, hence the higher possibility of the division making losses when resin costs are high.
  • Aiming for bulk orders. Apart from the Australian contract that was announced two days ago, the Group has recently reclaimed the contract from Monoluxury S/B, which commands a 20% market share in Genting Highland’s fresh salad and herbs market. Besides supplying the plastic tray packaging products to them, it is also involved in the labeling process, which helps to fetch better margins.
  • Focusing on the product mix. Management explained that the main reason behind the weaker 1HFY20 sales is that it is in the midst of realigning its focus on the product offering, focusing more on high margin and customized products. It has revised up its ASP for lunch boxes from RM51/carton to RM62/carton, which is 13%-20% more expensive than its competitors. On the negative side, it tends to result in weaker sales volume though management will free up space to cater for customized products, namely, ready-to-eat meal tray, takeaway delivery tray and bakery tray which will fetch more attractive margins.

Source: PublicInvest Research - 11 Dec 2019

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