FY19 recorded CNL of RM5.1m, missing our expectation, due to higher-than-expected cost incurred. Despite making losses, SCGM declared final dividend of 0.25 sen (FY19: 1.5 sen). The group has also fully moved to the Kulai Plant, bringing capacity to 67.6k MT/year (from c.41.0k MT/year). Post results, we cut FY20E CNP by 66% on and introduce FY21 CNP of RM4.2m. Maintain UP with a lower TP of RM0.805 (from RM0.850).

FY19 recorded Core Net Loss (CNL) of RM5.1m, missing our fullyear year expectations of RM2.2m. No consensus was available. Top-line was within expectations at 97%, but results missed our estimates due to higher-than-expected cost incurred from higher raw material cost and factory transition cost which resulted in EBIT margins of 1.8% being weaker than our expectation of 3.3%. A final dividend of 0.25 sen brought FY19 dividend to 1.5 sen, coming above our dividend forecast of 1.3 sen. 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.

Results highlight. YoY-Ytd, despite higher top-line (+6%), FY19 recorded CNL of RM5.1m, mainly due to; (i) lower operating margin (- 8.2 ppt) from higher raw material cost and cost incurred during the transition period in both old and new plants, (ii) higher finance costs (+247%), and (iii) higher tax expense (+26%). QoQ, 4Q19 recorded losses of RM7.0m due to: (i) lower sales (-9%) from the long holidays in February 2019, (ii) higher operating costs from higher labour and overhead expenses which saw operating level recording losses (vs operating profit of RM0.9m in 3Q18).

Outlook. The group will focus on increasing its sales of F&B packaging in both the local and export markets and aims to introduce more degradable and biodegradable plastic packaging products. Meanwhile, the group has fully moved to the Kulai Plant at end of April 2019, boosting production capacity to 67.6k MT/year (from c.41.0k MT/year). We assume maintenance capex of RM15-15m for FY20-21E.

Lower FY20E CNP by 66% (low base effect). Our FY20E CNP was lowered on weaker operating margin assumption of 3.0% (vs 4.6% previously), in view of the high-cost environment over the past few quarters. We also introduce FY21E CNP of RM4.2m on the back of a conservative top-line growth assumption.

Maintain UNDERPERFORM with a lower Target Price of RM0.805 (from RM0.850). Post housekeeping and lowering our earnings estimate, we lower our TP to RM0.805 based on an unchanged ascribed PBV of 0.9x to a lower BVPS of RM0.91 (from RM0.96 in FY20E). Our ascribed PBV multiple is based on -2.0SD to its 4-year historical average Fwd PBV 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 - 28 Jun 2019