1H17 core earnings of RM10.7m was within our expectation (46%). A second interim dividend of 2.0 sen is also on track (50%). Maintain FY17-18E of RM23.2-30.1m. The company expects to grow capacity by 44% in FY17 and by 2.5x to 62.6k MT/year by FY19, while we estimate capex of RM47-43m in FY17-18E. Maintain OUTPERFORM and TP of RM3.81 on decent total returns of 17%.

1H17 core net profit of RM10.7m is within our expectation, achieving 46% of our FY17E estimate, while consensus estimates are lacking. Second interim dividend of 2.0 sen was declared, bringing 1H17 dividend to 4.0 sen (50%). This is well on track to meet our FY17E dividend of 8.0 sen (2.4% yield).

Result highlights. QoQ, CNP was up by 3% on the back of positive top line growth (11%) mainly from local as well as export demand, with local sales driven by higher orders of lunch boxes and disposable cups. However, this was muted by decreased interest income and s slightly higher tax rate. YoY-Ytd, CNP saw a significant improvement of 23%, mostly on positive top line growth due to similar reasons mentioned above coupled with a lower effective tax rates of 15.6% (from 17.8%) due to the utilisation of capital allowances and reinvestment allowances.

Outlook. The company intends to increase its capacity by 44% to 36.0k MT/year by Dec 2016 as they will be renting a 20k square foot (sq ft) facility in Kulai to house 2 new extrusion machines which we have accounted for in our estimates. Longer-term expansion plans include a new plant targeted for completion in FY19, which will boost production capacity by 2.5x to 62.6k MT/year. All in, the Group expects to spend RM136.8m for its capex plans, while we expect capex allocation of RM47-43m in FY17-18E. Note that we make no changes to our FY17-18E of RM23.2-30.1m.

Maintain OUTPERFORM with TP of RM3.81 based on a Fwd. PER of 19.9x applied to CY17E EPS of 19.2 sen. Our Fwd. PER of 19.9x is based on a slight discount to SLP’s Fwd. PER of 21.5x with a potential total returns of 17%. We continue to maintain our OUTPERFORM call on SCGM for its: (i) strong FY17-18E earnings growth of 15-30%, (ii) medium- and long- term extrusion capacity expansion, (iii) new F&B container market opening up on state-wide polystyrene container ban, and (iv) being a beneficiary of higher USD, with USD-denominated sales and RM-denominated costs.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand from overseas (47% of sales), (iii) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share

Source: Kenanga Research - 9 Dec 2016