1H18 core earnings of RM11.0m came below our (40%) and consensus (43%) estimates. 1H18 total dividend of 2.61 sen (post accounting for the bonus issue) is also below at 40%. Maintain FY18-19E CNP of RM27.7-35.1m for now with a possible downside caution pending the results briefing today. We expect capacity to grow to 67.6k MT/year (+88%) by 2H19. Maintain MARKET PERFORM and FD Ex-All TP to RM3.00.

1H18 core net profit of RM11.0m is below our (40%) and consensus (43%) estimates. Although top-line was within (46% of our estimates), we believe the weaker earnings is due to soft 1H18 EBIT margin of 12.8% vs. our estimate of 14.6%, likely on higher-thanexpected raw material cost and changes to the sales mix. This is the third quarter in a row which disappointed us. We expect further clarification from management during the briefing later today. A second interim dividend per share of 1.50 sen was declared, implying 1H18 total dividend of RM5.06m or 2.61 sen per share post accounting for the enlarged share base from the bonus issue (completed in Jul 2017). This was also below our expectation at 40% of FY18E dividend of 6.50 sen (2.4% yield).

Result highlights. QoQ, top-line was down by 3% as sales were affected by weaker demand locally, and holiday season in 2QFY18. Although EBIT margin declined (-0.8ppt) from higher raw material cost, the impact to bottom-line (-1%) was cushioned by lower effective tax rates of 13.7% (vs. 16.6% in 1Q18). YoY-Ytd, top-line growth was strong (+32%) on both local and export sales, which we reckon is from growing sales for lunch boxes and plastic cups. However, CNP was only up by 3% as; (i) EBIT margin was compressed by 3.7ppt, likely due to similar reasons mentioned above, and on (ii) higher financing cost (+270%), which weighed down its top-line growth.

Outlook. The Group’s longer-term expansion plans for a new plant are targeted for completion in Dec 2018 (FY19) in Kulai, boosting production capacity to 67.6k MT/year. We are expecting FY18-19E capex of RM60-54m, with FY18E capex to be utilised 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 constructing its Kulai factory. We expect low effective tax rates of 13-18% for FY18-19 as SCGM will benefit from reinvestment allowance.

We make no changes to FY18-19E CNP of RM27.7-35.1m for now pending further clarification from management in the results briefing later today. However, we caution of a possible downward adjustment to earnings on compressed EBIT margins and may look to trim earnings if the current weak margins are expected to persist.

Maintain MARKET PERFORM and FD Ex-all TP of RM3.00. We make no changes to our FD Ex-all TP which is based on a FD CY18E EPS of 15.3 sen (post accounting for the bonus issue and full conversion of warrants) and an unchanged Fwd. PER of 19.6x which is higher than SLP’s Fwd. PER of 18.7x due to SCGM’s slightly better margins and strong earnings growth. We maintain our MARKET PERFORM call for now, but our call and TP are subject to review, pending the results briefing.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand from overseas, (iii) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share.

Source: Kenanga Research - 8 Dec 2017