9M17 core earnings of RM17.3m was within our (70%) and consensus (77%) expectations. A third interim dividend of 2.0 sen is also on track (70%). Maintain FY17-18E of RM24.8-32.0m. We expect capacity to grow by 44% in FY17 and from there by another 74% to 62.6k MT/year by FY19, while we estimate capex of RM47-43m in FY17-18E. Maintain OUTPERFORM but upgrade TP of RM4.38 (from RM4.05) as we roll forward our valuations to FY18E.

9M17 core net profit of RM17.3m is within our (70%) and consensus (77%) FY17E estimates. A third interim dividend of 2.0 sen was declared, bringing 9M17 dividend to 6.0 sen (70%) which is well on track to meet our FY17E dividend of 8.6 sen (2.2% yield).

Result highlights. QoQ, CNP was up by 22% driven by positive top-line growth (+9%) from both local and export demand, and lower effective tax rate (-1%) on utilization of capital and reinvestment allowances for the new plant and equipment. YoY-Ytd, CNP was up by 10%, mostly on positive top-line growth (+25%) due to similar reasons mentioned above coupled with a lower effective tax rate of 10.9% (from 19.0%).

Outlook. The Group is a silver sponsor at the upcoming 2017 South East Asian Games and ASEAN Para games in Kuala Lumpur in 3QCY17, which should bode well for sales of disposable lunch boxes and cups. SCGM is renting a 20k square foot (sq ft) facility in Kulai to house two new extrusion machines, increasing its capacity by 44% to 36.0k MT/year (end-2016) while longer-term expansion plans include a new plant targeted for completion in FY19, which will boost production capacity to 62.6k MT/year. All in, we expect capex allocation of RM47-43m in FY17-18E. Note that we make no changes to our FY17-18E earnings estimates of RM24.8-32.0m.

Maintain OUTPERFORM and further upgrade TP to RM4.38 (RM3.81) as we roll forward our valuation to FY18E EPS of 22.0 sen (from CY17 EPS of 20.4 sen), pricing ahead for the coming year. We maintain our Fwd. PER of 19.9x based on a slight discount to SLP’s Fwd. PER of 21.5x, commanding 17.5% total returns. We like SCGM and maintain our OUTPERFORM call on the back of: (i) strong FY17-18E earnings growth of 23-29%, (ii) bullish 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 - 16 Mar 2017