SCGM returned to the black in 1Q20 which exceeded our expectation by 168%, as EBIT margin swung to +6.4% (from -6.4% in 4Q19) on lower raw material cost. First interim dividend of 0.25 sen is within. The group has also fully moved to its Kulai plant, bringing capacity to 67.6k MT/year (from c.41.0k MT/year). We increase FY20-21E CNP to RM7.7-9.2m (from RM1.4-4.2m) on better EBIT margins. Upgrade to MP (from UP) with a higher TP of RM1.05 (from RM0.805).

1Q20 above expectations. 1Q20 earnings returned to the black with CNP of RM2.4m (168%) which was above our expectation of RM1.4m for FY20 given the low base effect. Topline came in within our expectation, but the deviation in the results was due to the swing in EBIT margins which improved to 6.4% on lower raw material cost (vs. - 6.4% in 4Q19), while our estimate for FY20 is 3.5%. The Group announced a first interim dividend of 0.25 sen which was within our expectation (at 25%) as we expected above average dividend payout (of 134%) as it is not unusual for SCGM to pay dividends even during loss-making quarters.

Results’ highlight. QoQ, topline was up (+10%) on higher local and international sales. EBIT margins picked up to 6.4% (from -6.4%) on lower raw material cost while effective tax rate was unusually low at 0.3% (vs. 48% in 4Q19), which caused bottomline to return to the black to RM2.4m (vs. CNL of RM6.3m). YoY, topline was flattish, but EBIT margin saw improvements of 1.5ppt likely due to similar reasons mentioned above. This coupled with low effective rates due to the utilisation of capital allowance allowed CNP to increase by 110%.

Outlook. The group will focus on increasing 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). Over the longer run, SCGM will focus on improving operational efficiency through increased automation to achieve better economies of scale from the new factory. We assume maintenance capex of RM15- 15m for FY20-21.

Going forward, we increase FY20-21E CNP to RM7.7-9.2m (from RM1.4-4.2m), up by 437-116% (low base effect) on higher EBIT margin of 6.3-7.0% (vs. 3.0-4.6% in FY20-21E) closer to current levels. We will continue to monitor margin going forward as it remains a volatile factor to earnings stability, while other contributing factors include a stable product mix. We may look to increase margin estimates in coming quarters as the Group continues to garner better topline growth and economies of scale.

Upgrade to MARKET PERFORM (from UP) with a higher Target Price of RM1.05 (from RM0.805). We increase our TP upon increasing our ascribed PBV multiple to 1.15x based on -1.5SD to its 4-year historical average Fwd. PBV (from 0.90x, -2.0SD) on earnings improvement this quarter. That said, we maintain our PBV valuation method as we remain cautious given that this is the first quarter of positive earnings, and will look to switch our valuation method back to PER upon more consistent earnings delivery going forward.

Risks to our call include: (i) higher-than-expected resin cost, (ii) lower product demand from overseas market, and (iii) weaker foreign currency rates.

Source: Kenanga Research - 25 Sept 2019