· New Plastic Cup business to add RM15.1m in FY16 revenue. We estimate that the new plastic cup business will add an additional RM15.1m to FY16 revenue, assuming the plant runs at full capacity for 9 months and it is able to produce c.1.1 million cups per day since production began in mid-July. As at 1Q16, management has recognised RM439k sales from this new business, targeting local and international markets (i.e. Singapore, Indonesia, Myanmar, Pakistan, Philippines). We expect sales to pick up as: (i) pricing is predatory, and (ii) its cup quality is superior (i.e. more durable than existing brands). SCGM may purchase another plastic cup machine in FY16 (RM7m) should demand pick up.

· 1Q16 earnings were up by 38% YoY-Ytd to RM4.9m. 1Q16 earnings jumped by 38% mainly from overall stronger sales and (i) on forex gains from USD and SGD sales, (ii) Hari Raya sales during the quarter, (iii) higher export sales from six new international customers from Japan, Indonesia and India, and (iv) a small contribution from the new plastic cup business. EBIT margins improved by 3.3ppt to 20.3% on lower resin and transportation costs since oil prices declined in Nov- 14. All in, net profit margins also improved further by 3.5ppt to 16.5% from better topline growth on forex gains, and lower input cost.

· Making the most from weak oil prices. SCGM is benefiting from low resin cost due to falling oil prices. On top of that, resin is sourced locally (MYR denominated), which gives them an additional edge in costing since most packagers source resin internationally or more from USD denominated suppliers. Although most packaging companies benefit overall from lower resin costs from lower oil prices, SCGM enjoys the additional advantage of having its major material cost-base i.e. resin, in MYR rather than USD, which will enhance its margins. Additionally, the favourable SGD and USD exchange rates are expected to boost export revenue (currently 46% of total revenue) which grew by 12.4% YoY in FY15, and 1Q16 export sales is already 28% of FY15, due to the weaker Ringgit. Evidently, SCGM’s recent quarter's (1Q16) net margins were higher at 16.5% vs. SLP’s 15.1% and DAIBOCI’S 8.1%. SCGM’s net margins have been increasing over the past two years from 11.5% in FY14 to 14.5% in FY15, surpassing SLP’s 10.8% in 1Q15 (while we estimate SLP’s FY15-16E net margins to increase to 11.3%-13.6% upon capacity and downstream expansion). As for SCGM, we believe there may be room for margins improvement in the mediumterm should the MYR continue to weaken, and oil prices decline.

· 1-for-2 bonus issue will help increase liquidity. The recent EGM (held on 18 Aug-15) approved the 1-for-2 bonus issue, increasing SGCM’s share base to 120m, from 80m shares (ex-date: 1 Sept-15). The exercise is expected to be completed by 4Q15, and will help increase the liquidity and marketability of the stock which has already gained some 105% YTD to RM3.73.

· 40% dividend policy will only get better. The owner of SCGM holds more than 50% stake in the company (via family members and SCGM Lee Sdn Bhd), which aligns owners’ interest with shareholders as it encourages management to meet or even exceed the DPR (Dividend Payout Ratio). This is evident as DPR was at 67% in FY15 at 13.0 sen. Going forward, we believe management will continue to exceed expectations in terms of dividend payout, which would be potentially rewarding for shareholders. SCGM has already declared a 1st interim dividend of 5.0 sen for 1Q16, while dividends are paid out every quarter, while we expect DPS of at least 15.4 sen (post-bonus: 10.2 sen) in FY16E (4.1% yield) based on a 63% payout ratio, which is the historical 3-year average DPR.

· Fairly Valued. We rate SCGM as ‘Not Rated’ and ascribe a fair value of RM3.92 (post-bonus: RM2.62). Our valuation methodology is based on targeted PER of 16.0x on FY16E EPS of 24.5 sen (16.4 sen post bonus). PER-wise, we are pegging SCGM to trade slightly above consumer packager SLP (15.5x applied PER) for its: (i) superior net margins of 15.7%-14.8% in FY16-17E vs. 11.3%- 13.6% for SLP in FY15-16E, and (ii) higher DPR of 63% average over the last 3 years vs. 40% for SLP. As it stands, both companies are net beneficiaries of a weaker Ringgit, and their balance sheets are expected to be net-cash over the next 2 years, but SLP commands higher earnings growth of 75.8%-31.1% in FY15-16E vs. 27%-5% for SCGM in FY16-17E.

Source: Kenanga Research - 25 Aug 2015