9M18 core earnings of RM16.1m came below our expectations at (66%). No consensus available. 9M18 total dividend of 4.11 sen (post accounting for the bonus issue) was within at 72%. Lower FY18-19E CNP by 9-27% on lower margins going forward. We expect capacity to grow, up to 67.6k MT/year (+88%) by 2H19. Maintain MARKET PERFORM but lower FD Ex-All TP to RM2.00 (from RM2.65).

9M18 core net profit of RM16.1m is below our expectation at 66%. No consensus available. Top-line came in within (70% of our estimates), but we believe the weaker-than-expected EBIT margin of 12.2% (vs. ours of 13.0%) was likely due to higher-than-expected raw material cost and less than favorable sales mix. This is the fourth quarter in a row where results have disappointed our estimates. A third interim dividend of 1.50 sen was declared, implying 9M18 total dividend of RM7.96m or 4.11 sen post accounting for the enlarged share base from the bonus issue (completed in Jul 2017). This was within our expectations at 72% of FY18E dividend of 5.70 sen (2.4% yield) as we assumed a lower pay-out ratio of 45% vs. management’s actual 9M18 payout of 49%.

Result highlights. YoY-Ytd, top-line growth was strong (+26%) on improved demand for plastic products, which we reckon was from growing sales for lunch boxes and plastic cups. However, CNP declined by 7% on the back of; (i) weaker EBIT margin of (-4.0ppt) from higher resin cost, and, (ii) higher finance cost (+195%) on increased borrowings for expansion. QoQ, top-line was up by 3% on improved demand from local market. Although EBIT margin declined (- 1.4ppt) on higher resin cost, the negative impact to bottom-line was cushioned by lower effective tax rates of 0.9% (vs. 13.7% in 2Q18).

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 FY18-19E as SCGM will benefit from reinvestment allowance.

We lower FY18-19E CNP by 9-27% to RM22.0-23.3m (from RM24.3- 31.7m) post lowering our FY18-19E EBIT margins to 11.8-12.0% (from 12.9-15.3%), slightly more conservative than current levels of 12.2% as we are concerned over the constant margin compressions in previous quarters. Additionally, we also lowered our MYR/USD assumptions to RM3.90 (vs. RM4.10 previously). Going forward, we may look to upgrade our earnings should we see margin improvements.

Maintain MARKET PERFORM but lower our FD ex-all TP to RM2.00 (from RM2.65). Our FD ex-all TP is based on a lower FD CY18E EPS of 10.8 sen (from 13.7 sen after accounting for the bonus issue and full conversion of warrants), and a lower Fwd. PER of 18.5x (from 19.2x) on weaker margins and lower earnings growth going forward. Our applied PER is lower than SLP’s Fwd. PER of 18.7x due to SCGM’s weaker margins and earnings growth post trimming our earnings, but above TOMYPAK’s PER of 18.3x. However, we are comfortable and maintain our MARKET PERFORM call due to recent share price decline (-27% YTD), in tandem with the FBMSC (-7% YTD), while we believe we have also accounted for most earnings downsides going forward.

Source: Kenanga Research - 14 Mar 2018