We attended SCGM’s 3Q17 analysts’ briefing yesterday and remain confident on the Group’s outlook. Growth going forward will be driven by increased local demand from F&B packaging products and plastic cups segment, while capex plans remain intact. All in, no significant changes to earnings (+2% to FY17-18E). Maintain OUTPERFORM and increase TP to RM4.48 (from 4.38).

Strong YoY-Ytd revenue driven by local demand. Top-line grew by 25% YoY-Ytd mainly from local sales, which made up 60% of revenue (vs. 51% in 9M16). The strong growth in local sales (+44% in 9M17) was mainly attributable to the food packaging segment enjoying higher orders, benefitting from the ban on polystyrene food packaging, and higher plastic cup sales. Export sales also grew (+4.3% in 9M17) on four new international customers from Singapore, China, Chile and Hong Kong.

Expecting slightly higher operating cost going forward. Despite bottom-line growth, SCGM saw EBIT margins compress to 16.2% as at 9M17 (vs. 20.8% at 9M16) due to: (i) higher resin cost, (ii) higher staff cost, (iii) higher utilities, and (iv) higher depreciation of plant and equipment. While we have accounted for most of these costs, we believe our resin cost estimates may have been too optimistic. Additionally, SCGM plans to implement biodegradable Ecoplas resin over the next 6 months which we estimate could increase the cost of resin by an additional 5-10% (refer overleaf).

Capex plans on track. The Group’s capex plans are on track as they expect to grow capacity by 44% in FY17 and by a further 74% to 62.6k MT/year by FY19. However, to date, management has awarded contracts for RM54m for the new factory which is higher than our capex estimates. As a result, we are increasing our capex estimates to RM59-51m in FY17-18E (from RM46-43m) as we expect the bulk of capex for the new factory to be utilised in FY17-18 instead of FY19.

No significant changes to earnings. All in the net impact to our earnings is a slight 2% increase for both FY17-18E to RM25.4-32.7m after accounting for positives from: (i) higher top-line growth on higher ASP estimates, (ii) lower effective tax rate to 13-18% in FY17-18 (from 22-22%) from reinvestment and capital allowances post increasing our capex estimates, and after accounting for negatives from: (iii) higher resin cost in FY17-18E by c.15%. Our net gearing is also increased to 0.1x-0.3x in FY17-18 (from net cash - 0.1x).

Maintain OUTPERFORM but upgrade TP to RM4.48 (RM4.38) on a slightly higher FY18E EPS of 22.5 sen and an unchanged Fwd. PER of 19.9x based on a slight discount to SLP’s Fwd. PER of 21.5x. We remain positive on SCGM for its: (i) strong earnings growth of 26-29%, (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. At current levels, SCGM’s total returns are attractive at 23.2%.

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 - 17 Mar 2017