9M19 CNP of RM1.9m came way below our expectation at only 34% of FY19E CNP. No consensus available. However, 9M19 total dividend of 1.3 sen is within expectation (70%). New Kulai plant is targeted to be fully operational by 2H19, bringing capacity to 67.6k MT/year (from c.41.0k MT/year). Cut FY19-20E CNPs by 60-50% on poor results. Downgrade to UP (from MP) with a lower TP of RM0.850 (from RM1.15).

9M19 Core Net Profit (CNP) of RM1.9m came below our expectation at 34% of FY19E CNP. No consensus was available. Top-line was well within expectation at 74% but results missed primarily due to higher-than-expected raw material and utilities costs. A third interim dividend of 0.25 sen brought 9M18 to 1.3 sen, meeting our FY19E dividend of 1.9 sen (70%). The disparity between results and dividend paid was due to the higher-than-expected dividend pay-out ratio of 119% in 9M19 vs. our full-year assumption of 65% as the group still paid dividends this quarter despite recording losses. This is not unusual for SCGM as they had previously paid out dividends during loss-making quarters while FY18 recorded the highest payout ratio of 67%.

Results highlights. YoY-Ytd, top-line was up by 6% on better sales. However, operating profit declined by 63% to RM7.1m due to higher utilities, and higher raw material cost, while higher financing cost (+259%) dragged down PBT by 83%. All in, CNP declined by 88% on the back of higher effective tax rates of 36% (vs. 11% in 9M18) as some items may not be allowable for tax computation purpose in the current quarter. QoQ, top-line declined by 3% while EBIT margins thinned to 1.6ppt (from 6.1ppt) due to similar reasons mentioned above. As a result, bottom-line retreated into the red, recording RM0.7m CNL on the high effective tax rate.

Outlook. The group will focus on increasing its sales of F&B packaging in both the local and export markets. Meanwhile, its expansion plan for a new plant in Kulai is targeted to be fully operational by 2H19, 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.

Lower FY19-20E CNPs by 60-50% to RM2.2-4.3m. We trim our earnings as we lower CNP margins to 1.0-1.4% (from 2.3-3.3%), close to current levels of 1.1% in 9M19 as its high cost has continued to inflate and remain volatile. We will monitor SCGM’s razor-thin margins closely as any improvement in cost management could swing earnings upwards significantly. In line with the reduced earnings, we also have lowered our FY19-20E dividends to 1.3-1.3 sen (from 1.9-2.9 sen) despite revising up our payout ratio assumption to 115-70% (from 65%) in line with 9M19 payout level, while historically they have paid out between 48%-67% over the past five financial years.

Downgrade to UNDERPERFORM with a lower TP of RM0.850 (from RM1.15). Rolling forward the valuation base, we lower our TP based on an ascribed lower PBV valuation multiple of 0.89x (from 0.95x) on FY20E FD BVPS of RM0.96 (from RM1.18 in FY19E). Our PBV multiple is based on 4-year low PBV valuation (-2.0SD) as there is still no sign of margin recovery. We will continue to monitor its earnings trends and a convincing margin recovery may prompt a valuation upgrade.

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 - 27 Mar 2019