FY20 came above our expectation at 124% on better than expected CNP margin of 8.3% (vs. our estimate of 6.5%) on a tax income (vs. tax expense) and better-than-expected product mix. Increase FY21E CNP by 9% to RM21.1m on better margins and introduce FY22E CNP of RM23.6m. Maintain MARKET PERFORM and increase TP to RM1.90 (from RM1.40).

FY20 above on better than expected margins. FY20 CNP of RM17.5m is above our expectation at 124% of our RM13.8m estimate mainly due to higher-than-expected CNP margin of 8.3% vs. ours of 6.5% on: (i) a lower-than-expected effective tax with a tax income of RM1.4m (vs. our expectations of effective tax rate of 10%), and (ii) a stronger-than-expected EBIT margin of 9.9% (vs. ours of 9.7%) likely due to a favorable product mix in line with the group’s strategy to focus on higher margin products. FY20 dividend of 3.25 sen is also above (113%) our FY20 estimate of 2.9 sen, on higher than expected earnings.

Results’ highlight. YoY-Ytd, top-line was down by 4% on lower sales of F&B packaging products and electronic products. However, EBIT increased by 432% on optimal sales mix as well as lower resin cost. CNP was up to RM17.5m (vs. CNL of RM4.4m) on the back of lower financing cost (-13%) and a tax income of RM1.4m (vs. a tax expense of RM3.4m in FY19). QoQ top-line was down by 4% on lower sales from local and export markets, but operating profit was up by 43% on lower resin cost and higher margin products which includes the contribution from the new PPE product line (i.e. face shield) since Feb 2020. All in, CNP was up by 110% to RM7.9m, benefitting from a tax income of RM1m.

Outlook. SCGM will focus on increasing sales of F&B packaging which is its primary target and it has introduced a face shield mask for medical personnel since Feb 2020. Additionally, the group will be working on improving operational efficiency through increased automation to achieve better economies of scale from its new factory, and improve product margins via more customisable as well as higher margin products going forward. SCGM has returned to operating at 100% manpower during the Conditional MCO in end-April 2020.

Increase FY21E CNP by 9% to RM21.1m on better product margins and introduce FY22E CNP of RM23.6m. We increase FY21E EBIT margin to 13.9% (from 10.0%) as we expect stronger margin in FY21, and 14% EBIT margin in FY22 given better product mix in recent quarters, but lower our top-line estimates in light of weakness in sales as our top-line assumptions may have been too bullish. FY21-22E dividends are based on a 40% payout ratio of 4.4-4.9 sen, implying 2.2- 2.5% yields.

Maintain MARKET PERFORM but increase TP to RM1.90 (from RM1.40) upon increasing our PBV multiple to 2.0x (-0.5SD) on positive results (from 1.47x @-1SD) post updating valuations to its 5-year historical average on FY21E BVPS of RM0.95. Despite results coming above expectation, we opt to remain cautious in light of fluid sales trends and competitive markets amidst the Covid-19 pandemic which may threaten margins. For now, SCGM’s stable margins will be paramount and the group has to continuously increase sales of its higher margin products whilst riding on low resin price to avoid receding into the red again. We are comfortable with our call given strong share price momentum of (+45%) since our last report in end March.

Source: Kenanga Research - 30 Jun 2020