We attended its 4Q17 analysts’ briefing and remain positive on their long-term outlook. Despite slight margin compression in FY17, growth is driven by increased capacity in FY18 from a newly rented factory in the Klang Valley riding on increased demand for both F&B packaging and plastic cups, while we also expect lower tax rates in FY18. All in, we lower FY18E earnings (-6%) and maintain FY19 numbers. Maintain MARKET PERFORM but increase FD Ex-All TP to RM3.35 (from RM3.05).

FY17 saw margin compressions on higher raw material cost. Despite strong bottom-line growth in FY17 (+19% YoY), EBIT margins compressed to 15.1% in FY17 (vs. 19.7% in FY16) mostly due to higher resin cost, while we believe we have accounted for other cost increases previously (i.e. staff cost, utilities, depreciation of plant and equipment). Management had guided that resin cost has moderated since a high in February and March 2017 (4Q17). However, the Group’s current resin cost is still higher by c.10% YoY.

Renting out a new factory starting July 2017. SCGM announced its plan to rent a new 47k sf factory in Telok Panglima Garang, which will be its first factory in the Klang Valley, beginning July 2017, and will be running at full capacity by Dec 2017. The factory will house four (4) thermoform machines and two (2) extruders, producing 5k MT/year (at full capacity), costing RM20m in capex which the Group will fund from internally generated funds. This new rented factory will produce lunchboxes to cater to the existing Klang Valley market, which may provide better efficiency in the longer run from reduced transportation cost. All in, post the inclusion of this newly rented factory, we expect FY18-19E average capacity to increase to 39.2-49.9MT/year (from 36.0-44.9k MT/year).

Expecting capex of RM60-54m in FY18-19E. We are expecting FY18 capex allocation of RM60m (from RM51m) to be utilised mostly for: (i) the 2nd factory construction in Kulai, and (ii) the new Klang Valley rented factory, while FY19 capex of RM54m will be utilised for the Kulai factory construction. As a result, we lower our FY18E effective tax rates to 13% (from 18%) post increasing our capex estimates as SCGM will benefit from reinvestment tax allowance, while we maintain FY19E tax rates at 18%.

Lower FY18E NP by 6% while FY19E NP is unchanged. All in, post accounting for: (i) increased top-line growth from the new capacity in the rented factory (full capacity by 3Q18), (ii) EBIT margin compressions from higher raw material cost in FY18-19 to 16.2-17.9% (from 19.1-19.8%) , and (iii) lower effective tax rates in FY18 to 13% (from 18%), we are expecting FY18-19E earnings of RM30.9-38.1m. Maintain MARKET PERFORM but increase FD Ex-all TP to RM3.35 (cum TP RM4.90) from FD Ex-All TP of RM3.05. Our FD Ex-all TP is higher based on a FD CY18E EPS of 16.8 sen (from 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 most upsides have been priced in, while the group’s longer term prospects are intact 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 - 28 Jun 2017