1H19 CNP of RM2.5m came within our expectation at 46%. No consensus available. 1H19 total dividend of 1.0 sen is above our expectation (71%). Accordingly, we adjust our dividend pay-out assumptions to better reflect this quarter. Moving forward, the new Kulai plant is targeted to be fully operational by 3Q19, bringing capacity to 67.6k MT/year (from c41.0k MT/year). No changes to our FY19-20E earnings. Maintain UNDERPERFORM with TP of RM1.15.

1H19 Core Net Profit (CNP) of RM2.5m came within our expectation at 46%. No consensus was available. A second interim dividend of 0.5 sen was declared, bringing 1H18 dividend to 1.0 sen, which is above our expectation at 71% of our FY19E dividend of 1.3 sen. This was due to the higher dividend pay-out at 71% vs. our full- year assumption of 46%. This is not unusual for SCGM as they had previously paid out 71% in FY18.

Results Highlights. YoY-Ytd, top-line was up by 7% mainly driven by better local sales (+11%). However, 1H19 CNP was down by 77% due to: (i) higher resin cost and other operating expenses, which saw EBIT margins eroding by 7.3ppt, (ii) higher financing cost (+263%) and (iii) higher effective tax rate (+10.5 ppt). QoQ, CNP was up by 20% on: (i) higher sales from both local and overseas markets, which saw top-line increasing by 3%, (ii) better EBIT margin (+1.2 ppt), and (iii) lower effective tax rate (-6.9 ppt) from the utilization of reinvestment allowances.

Outlook. Food and beverage (F&B) plastic packaging continued to be the largest contributor to SCGM’s top-line, at almost 80% of total sales for 1H19. Moving forward, the group will focus on increasing its sales of F&B packaging in both the local and export markets. Meanwhile, SCGM’s expansion plan for a new plant in Kulai is targeted to operate fully by 3Q19, boosting production capacity to 67.6k MT/year (from c.41.0k MT/year currently). We are expecting FY19-20 capex of RM40- 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 earnings. Post results, we maintain our FY19-20E earnings of RM5.5-8.5m. However, we raise our FY19-20E dividend to 1.9-2.9 sen (from 1.3-2.0 sen) upon assuming a higher pay-out ratio of 65% (from 46%) to reflect the higher pay-out this quarter which is also within the range that they have paid out historically (48%-71% over the past five financial years).

Maintain UNDERPERFORM and TP of RM1.15. We maintain our TP at RM1.15 based on an ascribed PBV valuation multiple of 0.95x on FY19E FD BVPS of RM1.18 Our PBV multiple is based on 4-year low PBV valuation (close to -2.0SD) as there is still no strong signal of a margin recovery. We believe valuations are stretched, warranting an UNDERPERFORM call as we have priced in most positives, including capacity expansions in FY19-20. We will continue to monitor its earnings in subsequent quarters and may seek to upgrade our valuation upon encouraging sign of margin recovery.

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

Source: Kenanga Research - 14 Dec 2018