FY18 core earnings of RM15.4m came below our expectation (at 80%). No consensus available. However, FY18 total dividend of 5.60 sen (post accounting for the bonus issue) was above, at 124%. Lower FY19E CNP by 49% on lower margin and introduce FY20E. Downgrade to UNDERPERFORM and lower FD Ex-All TP to RM1.30 (from RM1.45) as we switch to PB valuation due to earnings volatility.

FY18 core net profit of RM15.4m is below our expectation at 80%. No consensus available. Top-line came in below (92% of our estimates) due to lower sales from domestic and overseas customers, while CNP margin was also weaker than expected at 7.4% vs. (8.5%) due to higher resin and labour costs. This is the fifth quarter in a row where results have disappointed our estimates. A fourth interim dividend of 1.50 sen was declared, implying FY18 total dividend of RM10.9m or 5.60 sen post accounting for the enlarged share base from the bonus issue (completed in Jul 2017). This is above our expectation at 124% of FY18E dividend of 4.50 sen (2.5% yield) as we had assumed a lower payout ratio of 45% vs. management’s actual FY18 payout of 66%.

Result highlights. YoY-Ytd, CNP was down by 32% to RM15.4m due to lower operating profit due to a combination of factors, including; (i) higher resin prices, (ii) higher finance costs, (iii) higher depreciation charges, and (iv) higher labour cost. EBIT margin was weaker at 10.0% (vs. 15.3%) while, effective tax rate was marginally higher at 14.3% (vs. 13.5%). QoQ, top-line was down by 10% due to lower sales from local and overseas customers which were affected by the holidays during the current quarter and strengthening of Ringgit Malaysia against major foreign currencies. All in, the Group recorded a Core Net Loss (CNL) of RM0.7m as EBIT margin declined by 8.0ppt due to similar reasons mentioned above.

Outlook. The Group’s longer-term expansion plan for a new plant in Kulai is targeted for completion in Dec 2018 (FY19), boosting production capacity to 67.6k MT/year. We are expecting FY18-19 capex of RM60-54m, with FY18 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 the Kulai factory. We expect low effective tax rates of 18-20% for FY19-20 as SCGM will benefit from reinvestment allowance.

We lower FY19E CNP by 49% to RM10.8m (from RM21.1m) and introduce FY20E CNP of RM15.1m. Our FY19E CNP was lowered on slower top-line growth due to weaker sales as we expect lower utilisation rates of 60% (vs. 75%) and FY20 utilisation rates of 55% on the increased capacity of 67.6k MT/year at the new factory. We also assume weaker margins going forward of 4.8% in FY19 (vs. 7.5%), and expect marginal CNP margin improvement in FY20 of 5.8%.

Downgrade to UNDERPERFORM (from MP) and lower our FD ex-all TP to RM1.30 (from RM1.45). We lower our TP to RM1.30 based on 1.10x PBV on FY19E FD BVPS of 1.2x (-2.0SD to the 5-year average) due to earnings volatility in light of missed earnings expectations over five quarters and record low earnings this quarter. As such, we are switching our valuation method to PBV (from PER). We believe valuations are stretched warranting an UNDERPERFORM call as we have priced in most positives, including capacity expansions in FY19-20 and weakness from margin compressions, while the near-term outlook for earnings stability remains challenging. As such, we opt to be conservative with our valuations, but may upgrade our earnings and valuations upon more concrete earnings improvements.

Source: Kenanga Research - 25 Jun 2018

Source: Kenanga Research - 25 Jun 2018