1QFY21 came in within our expectation at 30% while the dividend of 1.70 sen is also within at 26%. The Group remains focussed on its main F&B segment as well increasing its face mask production capacity during this pandemic. As such, we enhanced FY21-22E CNP by 13-11% to RM35-43m on higher face mask capacity. Maintain MARKET PERFORM and increase TP to RM3.85 (from RM3.45).

1QFY21 within expectations at 30%. 1QFY21 CNP of RM9.4m is within our expectation at 30% of our RM31.4m estimate. The dividend of 1.70 sen is also within (26%) of our FY21 estimate of 6.5 sen.

Results’ highlight. QoQ, top-line was up by 15% mainly on increased manpower utilisation to 100% from May-20 onwards under the CMCO, (vs. 50% manpower during the MCO from March to April-20) and the commencement of face masks sales in May 2020, which contributed positively to 1QFY21 revenue. As a result, CNP was up by 19% on the back of better EBIT margin of 16.8% (vs. 13.9%) due to improved sales mix and lower resin costs. YoY-Ytd top-line was up by 3% on higher export sales. However, CNP jumped by 285% on better margin (+10.4ppt) on favourable product mix and reduced resin prices.

Outlook. SCGM will focus on increasing sales of F&B packaging which is its primary target and has introduced a face shield mask for medical personnel since Feb 2020. The Group will be ramping up its face mask production with the latest acquisition of two units of face mask production machines in August. 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.

We increase FY21-22E CNP to RM35.3-42.8m (by 13-11%) from increased sales of face mask products from two additional machines and better product mix as face mask should be able to command higher margins vs. existing products. FY21-22E dividends are based on a 40% pay-out ratio of 7.3-8.9 sen, implying 2.0-2.5% yields.

Maintain MARKET PERFORM but increase TP to RM3.85 (from RM3.45) on 19x PER (+0.5SD to its 5-year historical average, excluding loss-making period) on a higher average FY21-22 EPS of 20.3 sen (from 18.2 sen) to encapsulate the bulk of new contributions which will be coming in FY22. Given strong expectations of profitable quarters going forward on stronger margins from its face mask business, and stronger demand for its F&B products which remains a formidable segment during the Covid-19 pandemic, we are comfortable with our valuations for now. Our MP call is maintained given its strong share price momentum (+120%).

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

Source: Kenanga Research - 29 Sept 2020