SCGM has proposed a 1-for-3 bonus issue and 2-for-15 issue of new warrants. We are not overly surprised but long-term positive as it rewards existing shareholders whilst enticing new investors, while proceeds from the warrants can be used for working capital to help facilitate its ongoing expansion plans at the new factory. We maintain earnings but downgrade our call to MARKET PERFORM (from OP) on a FD Ex-all TP to RM3.05.

Proposed Bonus issue and warrants. SCGM proposed; (i) 1 bonus share for every 3 existing SCGM shares, and (ii) 19.4m new warrants on the basis of 2 warrants for every 15 existing SCGM shares, with a 3-year tenure from the date of issue, while the exercise price of the warrants is yet to be fixed. The proposed warrants will be implemented concurrently with the proposed bonus issue of shares and the exercise is expected to be completed by 2H17 (FY18). The rationale of the exercise is to reward existing shareholders whilst encouraging trading liquidity of SGCM shares. Meanwhile, proceeds from the conversion of the warrants which are dependent on the exercise price and amount exercised will be used for any additional working capital or placed in deposits pending utilisation, while the time frame for the utilisation has not been determined.

Positive on the exercise in the long run. Although we did not expect the bonus and warrants announcement, we are not overly surprised by management’s decision as as it rewards existing shareholders whilst enticing new investors. We are mostly positive on this announcement as it improves trading liquidity, while new investors will deem the stock more tradeable at a lower entry price. As for the proposed warrants, we are positive in the long run as it provides funds for the Group’s ongoing expansion plans at the new factory, minimising the need for any borrowings and would help accrete to earnings in the longer run once the new factory is generating revenue.

All in, we make no changes to earnings of RM25.4-RM32.7m in FY17-18E, for now. However we adjust our per unit data based on a Fully Diluted (FD) basis to account for to bonus issue and full warrants conversion, increasing our FD share base to 213m units (from 145m units). Lastly, we expect net gearing in FY18 to reverse to net cash position (from 0.25x) pending utilisation of the proceeds from the warrants.

Downgrade call to MARKET PERFORM (from OP) with a FD Exall TP to RM3.05 (from RM4.48). Our FD Ex-all TP is based on a FD FY18E EPS of 15.3 sen (from 22.5 sen) post accounting for the bonus issue and full conversion of warrants (while the Ex-Price only accounts for adjustment from the Bonus issue), and an unchanged Fwd. PER of 19.9x based on a slight discount to SLP’s Fwd. PER of 21.5x. We are comfortable with our MARKET PERFORM call as we believe most upsides have been priced in with the share price doing well, up 20% YTD, while investors can remain assured on the group’s longer-term prospects in light of: (i) strong earnings growth of 26-29%, from bullish medium and long-term extrusion capacity expansion, (ii) F&B container market opening up on state-wide polystyrene container ban, and (iii) it being a continuous beneficiary of higher USD, with USD-denominated sales and RM-denominated costs.

Source: Kenanga Research - 2 May 2017