INVESTMENT MERIT

- A market leader. SCGM is a specialist manufacturer in thermovacuum forming tray for various types of packaging requirements. It is the market leader and the only public-listed company in this field. While 60% of its products are for local customers, overseas sales make up 40% of its revenue with Singapore being the largest export market.

- Margin improved despite stiff competition. Although the industry is highly competitive with two other major local players, namely Hiro Food Packages Manufacturing Sdn Bhd and Toli Packaging Industries Sdn Bhd, SCGM managed to register robust profitability with pre-tax margin improving to 10.7% in FY13 from 9.7% two years ago. This is largely thanks to its competitive advantage in recycling the raw material wastes efficiently and ability to pass on any cost increase.

- “No plastic” campaign is not an issue. Green awareness campaign has little impact on SCGM’s plastic segment given the entrenched lifestyle of convenient and cheap food packaging in society. In fact, it posted 9.4% and 18.0% topline growth in FY12 and FY13. While the local market is fairly saturated, SCGM is expanding to new markets in USA and Europe to boost earnings. However, profit margin for export market is very competitive.

- Fairly valued for now. Its share price has risen almost double in the past four months riding on the market’s good run postGE13. We value the stock at RM0.97/share, or 8.8x CY14 EPS which is at a 20% discount to the FBM Small Cap’s 11x PER. However, income seeking investors may look forward to its 5 sen NDPS, to be paid next month (ex-date: 02 Oct), which translate into a 5.1% yield. NOT RATED.

SWOT ANALYSIS

- Strengths: Market leader in thermo-vacuum forming and plastic sheet extrusion. Ability to recycle the raw material wastes efficiently.

- Weaknesses: Competition is stiff among the players, thus maintaining current profit margin is challenging.

- Opportunities: Margin improvement from reducing wastage by recycling the raw materials. Plan to produce plastic resins using recycle materials. Satisfy the needs of consumers wanting to go green and support further business growth.

- Threats: The rising awareness of green environmental concerns and the increasing trend of not using disposable plastic packaging may impact the plastic packaging industry over the long-term.

TECHNICALS

- Resistance: RM1.02 (R1), RM1.19 (R2)

- Support: RM0.91 (S1), RM0.82 (S2)

- Comments: Following the strong run up in June, SCGM now appears to be stuck within range-bound mode. A decisive breakout above RM1.02 would offer a buy signal with a technical target price of RM1.19. Until then, the technical picture remains largely uninteresting.

BUSINESS OVERVIEW

SCGM Bhd (“SCGM”), which was listed on the Bursa Malaysia in Feb-08 is an investment holding company. Through its only wholly owned subsidiary, Lee Soon Seng Plastics Industries Sdn Bhd, SCGM is principally involved in the manufacturing and trading of plastics products, such as thermo-vacuum-formed plastic packaging and extrusion sheets. A market leader in its field, its business network covers more than 12 countries.

CORE BUSINESS PRODUCTS

- Thermo-Vacuum Formed Plastic Packaging. The company has more than 5,000 different moulds currently for thermo-vacuum formed plastic packaging products. The company has the capabilities to thermo-vacuum form single-layer and multilayer extrusion sheets into plastic packaging, with thickness ranging from less than 0.11mm to 2mm.

- Extrusion Sheets. The company produces extrusion sheets, namely, APET, PET-G, GAG, HIPS and PP sheets. These extrusion sheets are semiraw materials used in the production of thermo-vacuum formed plastic packaging.

Source: Kenanga