FOREX still favourable, while resin cost remains low. Although most packaging companies benefit from lower resin costs as a result of lower oil prices, SCGM enjoys additional advantage of having its major material cost-base resin sourced locally (MYR denominated), ra r than in USD, which helps to enhance margins as it is less susceptible to USD fluctuations. Additionally, favourable SGD and USD exchange rates have boosted export revenue (currently 49% of total revenue, from 46% in FY15), while export sales grew by 32% YoY-Ytd in 9M16, due to weaker Ringgit. Evidently, SCGM’s recent quarter's (3Q16) net margins were higher at 18.9% vs. recent quarter SLP’s 17.9% and DAIBOCI’s 8.0%.

Strong growth driven by new capacity. SCGM completed its 10% private placement (11th Dec-15) and raised RM31.3m, mainly to facilitate capacity expansion. All in, RM15m will be utilised for acquiring new machinery namely; (i) two auto punching machines, (ii) two extrusion machines, (iii) one press forming machine, and (iv) computer numerical control machine, all by 4Q16, and should accrete from FY17 onwards. This is expected to increase production of rmo-vacuum formed plastic packaging up to 48% to 25,000MT/year in longer run. However, we only expect utilised capacity to gradually increase, by up to 20% to 20,200MT/year over FY17-18 as more customers are secured and pending construction of a new factory building (funded by RM7m from placement proceeds). SCGM is on lookout for landbanking opportunities for a new facility which may be funded via additional borrowings on top of placement proceeds. remaining RM9m of placement proceeds will be utilised for working capital. Additionally, cup business has increased efficiency, producing 1.3m cups/day (from 1.1m cups/day in 2Q16) on slightly higher average selling prices (ASP).

MOU with distributors ensures sales are met. Appointed Kim Tech Cheong (Jan-16) as sole distributor in East Malaysia and Brunei to tap into its distribution network of >6,400 retailers and manufacturers in F&B, while Group is constantly seeking similar distributorships nationwide to secure sales on increased production. We applaud this effort as it supports groups strong capacity expansion plans, and helps boost sales for its cup business, whilst allowing SCGM to focus on its core business and less on sales and marketing.

3Q16 likely strongest quarter, yet. quarter saw double-digit growth in local and export sales from year-end festivities, favorable exchange rates, and aggressive marketing on net margin expansions (+4.9ppt QoQ to 18.9%) on earlier reasons mentioned, growing 9M16 earnings by 60.4% to RM16.7m. Going forward, we do not expect 4Q16 earnings to be as strong as 3Q16, due to slightly lower forex rates QoQ (Ringgit to USD and SGD), and higher effective tax rates normalising to 23% (from 19% in 9M16) due to expiration of tax incentives.

Projecting earnings of RM24.4-27.3m in FY17-18E. In line with new expansion plans and increased cup sales aided by tie-ups with distributors, we have increased our FY16-FY17E earning by 6-19% to RM20.8-24.4m (from our previous report dated 15th Aug 2015), and introduce FY18E projections. We expect DPS of 11.6-13.0sen (3.9-4.3% yield) in FY17-18E based on a 63% payout ratio, which is historical 3-year average DPR.

Valuation. We ascribe a ‘Not Rated’ rating and fair value of RM3.09 based on a targeted PER of 15.5x on CY17 EPS of 19.9sen. PER-wise, we are pegging SCGM on par with SLP (15.5x on FY17E PER) as: (i) SLP’s FY16- 18E average net margins are only slightly stronger at 16.0% vs. SCGM’s of 15.7%, while (ii) SLP’s 3-yr CAGR of 14.5% is close to SCGM’s of 14.4%. At current levels, upsides are limited to 6.7% total returns.

Source: Kenanga Research - 6 Apr 2016