After a recent update with management, we remain bullish on SCGM. From the March peak, PET/PP (its main raw materials) costs have fallen 10%/18% but ASPs remain elevated on resilient demand and reduced competition. Its high-margin bento boxes are also selling well regionally. We expect such demand to remain resilient as consumers continue to go for take-away food while the re-imposed regional lockdowns continue to fuel demand for food packaging. We reiterate our OUTPERFORM call with unchanged TP of RM2.62 @ 15x PER on FY22 EPS of 17.5 sen.

Resin prices took a breather. Since resin prices peaked in March, PET and PP have fallen 10% and 18%, respectively. This is likely due to the resumption of production from US petrochemical plants, which were earlier shut due to the deep winter freeze. In the near term, we expect PET/PP resin prices to remain relatively unchanged at current levels of USD1,000/MT ~ USD1,300/MT. We forecast SCGM’s CY21 average resin cost to be USD1,100/MT (vs. YTD average of USD1,200/MT).

ASPs remain elevated for SCGM. YTD, ASPs have risen c.20% in tandem with the spike in resin costs in 1QCY21, allowing SCGM to comfortably pass on higher raw material costs. However, despite the fall in resin costs since April, SCGM has not adjusted their ASPs downward mainly due to: (i) resilient demand for its F&B packaging and (ii) reduced competition. More importantly, customers have not been negotiating for lower prices. We understand that this is largely because over the last few months, several of SCGM’s smaller competitors have ceased operations, as they were unable to withstand the sky-rocketing resin costs, allowing SCGM to gain market share. Moving forward, we foresee ASPs to remain at current levels on the back of resilient demand and stable resin prices.

Strong growth in high margin products. We believe the strong demand for its higher margin bento boxes, particularly in Singapore, will also fuel profit growth moving forward. These boxes have sold well as consumers continue to go for take-away food. With renewed lockdowns, no thanks to the resurgence of Covid-19 cases, we foresee resilient demand for takeaway packaging, as well as SCGM’s other food packaging for supermarkets and bakeries.

Maintain FY21E/FY22E estimates. We maintain our FY21E revenue/CNP of RM238m/RM32.9m. We also maintain our FY22E revenue/CNP of RM276.4m/RM33.5m. FY21E/FY22E DPS of 6.9 sen/7.0 sen imply yields of 3.1%/3.1%.

Reiterate OUTPERFORM with unchanged TP of RM2.62 based on FY22E EPS of 17.5 sen, using a 15x Fwd. PER (5-year mean excluding loss-making period). Based on FY22E EPS, the current price of RM2.25 implies Fwd. PER of 13x, which we believe is unfair given SCGM’s commendable ability to maintain ASPs in an environment with falling costs and on the back of resilient demand for its products.

Risks to our call include: (i) higher-than-expected resin prices, (ii) lower than expected demand & ASPs, (iii) volatile foreign currency fluctuations, and (iv) labour shortage.

Source: Kenanga Research - 20 May 2021