We came away from a virtual meeting hosted by SCGM’s management yesterday with more clarification on the company’s outlook. Following a strong recovery in FY20, management has set its sights on various measures, namely, i) shifting its focus to high margin customized packaging products, ii) paring down its gearing levels, iii) focusing on export markets in the next 3 years and iv) improving its sales mix and downtime. Given the current low resin material cost, we believe the Group should be able to enjoy double-digit gross margin which also paves opportunities for the Group to diversify into new markets and products. Maintain Outperform call with an unchanged TP of RM2.55.

• A jump in 4QFY20 margins. The Group saw its gross margin rise from 13% to 23% in 4QFY20, led by lower resin cost, which had fallen 19% YoY and 21% QoQ. Finance cost also fell 33% YoY, attributed to lower interest rate and a decline in total borrowing. Management has been more aggressive in paring down its debt level as its net gearing level fell from 63% to 50%. Meanwhile, its capacity production utilization has risen from 60% to 75% due to the 1-month order backlog since the MCO period. Its unutilized reinvestment allowance currently stands at RM20m over a 5-year period. For FY21, it expects to see a lower effective tax rate of 10%-15% and has allocated an annual capex of RM4m for normal maintenance.

• Targeting to grow export markets. Post the Covid-19 outbreak, SCGM has seen significant improvement in export sales owing to a pick-up in orders from Singapore, Australia, UK and Philippines. During 4QFY20, export sales, which contributed 37% to Group sales, rose 17.9% YoY to RM18.2m. Management plans to penetrate into more diversified markets to bump up its overall sales. It is currently in advanced negotiations with a UK distributor that could potentially take up a sizeable order. The Middle East region is the next region that it plans to penetrate.

• Outlook for resin cost. Despite seeing a rebound in crude oil price since April, resin prices, which made up 65% of total costs, has stayed at low levels. The company has no hedging policy for its resin with inventory supply currently standing at 1.5 months. The company will pass on the additional cost to consumers partially by revising up its average selling prices in the event its margin is hit by the rising resin cost.

• PPE under margin pressure. The Group ventured into the personal protective equipment (PPE) business in February with the production of face shields, followed by face masks. Face shields generated total sales of RM4.2m in 4QFY20. Meanwhile, face masks which has a monthly capacity production of 1m pieces, has started production since May 2020. Given the influx of face masks from China and local producers, the 3-ply face mask selling prices have been on the downtrend. Management is in the midst of securing approval from the authorities to export its face masks to Singapore. Given the stiffer price competition for face masks and declining demand for face shields, management has lowered its gross margin assumption from 40% to 20%-25%.

Source: PublicInvest Research - 1 Jul 2020