Highlights

• A one stop leading thermo-vacuum formed plastic packaging manufacturer… SCGM manufactures and sells its thermos-vacuum formed plastic products to local market as well as exports to 20 countries.

• New expansion on plastic cups… Since SCGM see great potential of plastic cups at Pasar Pagi/Malam markets, SCGM has commissioned its new plastic cup production line in March 2015. The Group expects its revenue to grow by 7% to 8% yoy for FY16. Going forward, this new products has the potential of cont ributing RM20m revenue per year or 18.6% of FY15 revenue. Thus, the new production line of plastic cup products is expected to boost its performance in FY16 onwards if it is able to penetrate the market.

• Beneficiary of stronger USD & SGD… Based on its FY14 annual report, every 5% appreciation in USD/SGD vs. MYR would translate into RM0.121m or RM0.439m increase respectively in its FY14 Net Profit (or +1.0% or +3.8% respectively).

• Beneficiary of low crude oil prices… The recent plunge in crude oil prices has sent raw materials resin prices on a downward trend. A decline in resin prices will definitely have a big effect on downstream player, like SCGM as resin contributes circa 50% input costs. Hence, SCGM should record margin improvement in upcoming quarterly results.

• Industry outlook remains buoyant… Malaysian plastics industry remains bright; especially export market , which will have a positive spillover effect on SCGM.

• Strong earnings track records and balance sheet… SCGM has uninterrupted profit growth over last 5 years; relatively high ROE of 21.2%; net cash per share of 5.6 sen; and attractive dividend yield of 4.1%. SCGM has implemented a policy of paying dividends every quarter and adopted a dividend policy of no less than 40% of annual net profit effective 2015.

Catalysts

• Margin expansion from stronger USD & SGD; sustained runup in plastic packaging industry; and low raw materials prices.

• New expansion on plastic cups.

Risks

• Foreign currency exchange risks; Prices of raw mat; and Production or operational risks.

Forecasts

• -

Valuation

• At current share price of RM3.45 per share, SCGM is trading at FY15 P/E of 17.6x, 2.8% discount to the plastic packaging average industry P/E of 18.1x. Assuming SCGM is able to achieve additional 7% to 8% revenue growth from the new plastic cup and able to maintain margin, P/E for FY16 would drop to 16.5x.

Source: Hong Leong Investment Bank Research - 6 Jul 2015