SCGM saw its 9MFY21 earnings double to RM25.9m, driven by stronger plastic packaging earnings from both the export and local markets. The results surpassed our and consensus expectations, making up 83.8% and 78.0% of full year numbers respectively. A higher DPS of 2.2sen was declared for the quarter, bringing the cumulative dividend to 5.4sen (vs 9MFY20: 1.8sen). Despite the strong set of results, we retain our earnings forecasts as we expect margin pressure in the final quarter due to the rising resin material costs. We are lowering PE multiples to 15x (previously 22x) given the heightened uncertainties from resin costs. But we still like the growth prospects of the Group because of the strong F&B plastic packaging demand. Maintain Outperform call with a lower TP of RM2.62.

• 3QFY21 sales rose 21% YoY. Group sales rose to RM62.5m as F&B packaging sales climbed 23.2% YoY to RM52m. The encouraging F&B sales were mainly driven by robust demand for bento boxes, bakery trays and other products amidst the Covid-19 pandemic. Meanwhile, the new personal protective equipment segment also contributed to the stronger Group sales given the continuing demand of face masks and face shields from the local market.

• Bottomline jumped 88.1% YoY. The Group’s core earnings surged 88.1% YoY to RM7.9m on the back of improved gross margin and lower finance cost as a result of lower interest rates and reduced bank borrowings. Meanwhile, cost savings from closure of the Telok Panglima Garang plant also contributed to the stronger earnings.

• Allocating RM20m capex for FY22. The Group has allocated RM20m for the purchase of extrusion and forming machines to meet the increasing demand from the F&B business given the increasing amount of food takeaways amidst the Covid-19 pandemic.

• Resin prices have been on the uptrend. In tandem with rising crude oil prices, the price of resin (refer to Figure 3), which makes up more than 65% of the total operating cost, has seen a sharp increase. Polypropylene (PP), which accounts for 50% of the total resin consumption, saw its selling prices nearly double to USD1,540/mt since hitting the low in May 2020. Meanwhile, Polyethylene Terephthalate (PET), which is the second largest component of resin cost, saw its selling prices increase from USD775/mt to USD1,350/mt. We understand that the company has passed on the additional cost to the customers in view of the robust demand for plastic packaging products. However, there will be a lagged effect as it takes at least 2 quarters to reflect the adjustments.

Source: PublicInvest Research - 30 Mar 2021