1Q19 core earnings of RM1.1m came below our expectation (at 10%). No consensus available. 1Q19 dividend of 0.5 sen was also below (19%). We maintain our FY19-20E CNP of RM10.8-15.1m for now, but caution for a downside bias pending the results briefing later today. Maintain UNDERPERFORM and our FD Ex-All TP of RM1.30.

1Q19 core net profit of RM1.1m is below our expectation at 10%. No consensus available. Top-line came in within (25% of our estimates) but the weakness was due to margin pressure as we expected CNP margins of 4.8% in FY19 vs. 1Q19 CNP margin of 1.9%, which is due to higher-than-expected cost from utilities, resin, and labour. This is the sixth quarter in a row where results have disappointed our estimates. A first interim dividend of 0.5 sen was declared, which was also below, at 19% of our FY19E of 2.6 sen.

Result highlights. YoY, top-line was up by 4% likely on better sales. However, EBIT margin erosion by 8.3ppt from high cost of resin, labour, utilities and depreciation as well as higher financing cost (+234%) weighed down on CNP which declined by 80% to RM1.1m. Meanwhile effective tax rate of 29.7% was higher than the statutory tax rate due to provision for deferred tax and non-deductible expenses. QoQ, top-line was up by 16% due to similar reasons, and slightly better EBIT margin (+2.0ppt). This resulted in bottom-line turning into the black to RM1.1m (from CNL of RM0.7m).

Outlook. The Group’s expansion plan for a new plant in Kulai is targeted for completion in Dec 2018 (FY19), boosting production capacity to 67.6k MT/year (from c.41.0k MT/year currently). We are expecting FY19-20 capex of RM50-15m mostly for the Kulai factory. We expect low effective tax rates of 18-20% for FY19-20 as SCGM will benefit from reinvestment allowance in coming quarters.

Maintain FY19-20E NP of RM10.8-15.1m for now, pending the briefing later today. We caution a downside bias to our earnings as we look to trim earnings pending further clarity with management on cost pressures.

Maintain UNDERPERFORM on an unchanged FD ex-all TP of RM1.30. We maintain 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 six quarters. We believe valuations are stretched warranting an UNDERPERFORM call as we have priced in most positives, including capacity expansions in FY19-20, and we caution downside bias to our valuations due to weakness from margin compressions, while the near- term outlook for earnings stability remains challenging. However, we may look to up valuations upon more concrete earnings improvements going forward.

Risks to our call include; (i) lower-than-expected resin cost, (ii) higher product demand from overseas, and (iii) foreign currency risk from weakening Ringgit.

Source: Kenanga Research - 21 Sept 2018