FY17 core earnings of RM22.6m came below our (90%) but within consensus (96%) expectations. A fourth interim dividend of 2.0 sen is also below expectations. We maintain FY18E numbers for now and introduce FY19E earnings of RM32.7-38.0m pending the results briefing. Going forward, we expect capacity to grow by up to 74% to 62.6k MT/year by 2H19. Maintain to MARKET PERFORM on a FD Ex-all TP of RM3.05.

FY17 core net profit of RM22.6m is below our (90%) but within consensus (96%) FY17E estimates. Top-line is within expectation (105%). However, we believe the deviation from our estimates are due to higher-than-expected operating expenses in 4Q, likely from higher raw material cost and other operating expenses, which dragged down FY17 EBIT margins to 15% (vs. our estimate of 17.5%). A fourth interim dividend of 2.0 sen was declared, bringing FY17 dividend to 8.0 sen which is also below our expectation at 90% of our FY17E dividend of 9.0 sen (2.0% yield).

Result highlights. QoQ, top-line was up by 15% from stronger local and export sales, but CNP was down by 19% due to: (i) lower EBIT margins (-3.3ppt) likely on higher operating expense and raw material cost, and (ii) higher effective tax rates of 23% (vs. 0.9%). YoY-Ytd, CNP was up by a solid 19%, driven by positive top-line growth (+34%) due to similar reasons mentioned above coupled with a lower effective tax rate of 13.5% (from 21.6%).

Outlook. The Group is a silver sponsor for 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. The Group’s longer-term expansion plans include a new plant targeted for completion in Dec 2018 (FY19) which will boost production capacity to 62.6k MT/year. SCGM has proposed the followings; (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 the exercise expected to be completed by 2HCY17 (FY18).

FY18E earnings unchanged for now. We make no changes to our FY18E earnings pending SCGM’s results briefing on 23rd June 2017. Pending more clarification on the Group’s margins going forward, we caution a slight downside bias. Additionally, we introduce FY19E numbers, with new capacity of up to 62.6k MT/year, expected come in by Dec 2018. We expect the new capacity to provide 4-month contribution in FY19, and fully accrete in FY20, with plant utilisation rate of 81-75% in FY18-19E. All in, we expect FY18-19E earnings of RM32.7-38.0m.

Maintain MARKET PERFORM with a FD Ex-all TP of RM3.05 (cum TP RM4.48). Our FD Ex-all TP is based on a FD FY18E EPS of 15.3 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 due to SLP’s better margins and higher ROEs. We are comfortable with our MARKET PERFORM call as we believe most upsides have been priced in, while investors can remain assured on the group’s longer term prospects in light of: (i) decent earnings growth from long-term extrusion capacity expansion, and (ii) F&B container market opening up on state-wide polystyrene container ban.

Source: Kenanga Research - 22 Jun 2017