We attended SCGM’s analyst briefing yesterday and came away with some healthy guidance from management. The Group has drawn out plans to expand its production capacity substantially over the next three years as is currently almost fully utilized. Current share presents a good opportunity to accumulate after the recent correction given its i) recession-proof business, ii) substantial capacity expansion in the pipeline and iii) attractive valuations at 15-16x PER. Maintain Outperform with an unchanged TP of RM4.00.

Continue registering double-digit growth in both export and local markets. Export sales grew at a healthy trend of 13.3% in the 1QFY17 while local market grew at larger pace at 41.3%. Local sales made up 57% while the remainder came from export market. All three major segments achieved impressive growth. F&B, the biggest sales contributor, grew 17.3% YoY, followed by extrusion, medical & others, 47.4% and electronic, 24.4%. EBITDA margin softened from 25.2% to 21.8%, mainly dragged by an increase in staff cost and electricity consumption. The higher staff cost was attributed to the switch from foreign workers to local workers as a result of the recent labour issue.

Almost reaching full capacity. During the quarter, the Group’s extrusion capacity reached 25m kg/year, which used up almost 96% of its total capacity. It was also a significant jump of 38.8% compared to 1QFY16. Given the surge in demand for bio-degradable lunch boxes in local market, the Group has temporarily rented a 20,000 sq ft premise to accommodate 2 thermo-forming machines and 2 extrusion machines, which will be fully ready for commissioning by end-Oct (2QFY17). The machines are mainly for the bio-degradable lunch boxes and are expected to increase its current extrusion capacity from 25m kg/year to 36m kg/year. In addition, it will also install a dual-colour extrusion machine at its existing plant mainly for the confectionary products, which can fetch higher margins. Meanwhile, another new plastic cup production line is being added due to insufficient capacity.

Gearing up balance sheet. The Group needs to allocate about RM110m for the new plant, which will further increase its capacity to 62m kg/year at a 19.2-acre land in Kulai. It is expected to be completed by end-2018 and construction will kick start by end-2016. Management plans to raise about RM46m from the private placement while the remainder will come from borrowings.

Earnings outlook. Management guided that it expects earnings margin to soften in the coming quarters due to rising cost and stiffer competition. However, the lower margins will be offset by its healthy double-digit growth in the topline, led by higher sales volume.

Source: PublicInvest Research - 6 Sep 2016