FY21 CNP of RM34m came in within at 103% of our estimate of RM32.9m while DPS of 7.1 sen also came within at 97% of our 7.3 sen estimate. Moving forward, we view the 60% workforce limit as merely a hiccup, as we foresee SCGM ramping up utilisation after the lockdowns are eased, given robust F&B packaging and face masks orders, driven by renewed lockdowns and resurgent Covid-19 cases. We believe that SCGM will focus on ramping up its utilisation and eventually increasing capacity for its high-margin products in FY22. Reiterate OP with a higher TP of RM3.02 (from RM2.62) on 15.5x Fwd. PER on FY22E EPS of 19.5 sen.

FY21 within expectation. FY21 CNP of RM34m came in within at 103% of our estimate. FY21 DPS of 7.1 sen is also within at 97% of our forecast.

YoY, revenue rose 17.1% to RM246.5m (from RM210.5m) thanks to: (i) higher volume from the F&B packaging and Personal Protective Equipment (PPE) segments, and (ii) higher ASPs. PBT rose 133.8% due to favourable sales mix, lower administrative cost and lower finance costs. CNP rose 94.4% in line with 94.5% of PAT.

QoQ, revenue was up 5.1% to RM 65.7m (from RM62.5m) on the back of: (i) strong volumes from robust demand in F&B packaging and PPE segment from both export and local markets, and (ii) elevated ASPs. PBT rose 23.6% as PBT margin rose 2.2ppt to 14.9%, likely due to: (i) unchanged ASPs amidst falling resin costs, (ii) operational cost efficiencies, and (iii) a better product mix. All in, CNP was up by 19.4% to RM7.9m (from RM6.6m).

Outlook. Due to lockdowns and 60% workforce limit, SCGM is experiencing a slowdown in productivity with an utilisation rate of 50- 55%, compared to the 65-75% pre-MCO. That said, the lockdowns and resurgent cases have also boosted SCGM’s F&B packaging and PPE orders, namely: (i) higher-margin lunch boxes, (ii) food packaging for supermarkets and bakeries, and (iii) face masks. Therefore, we believe the slowdown in productivity is merely a hiccup, as we foresee SCGM running at an utilisation rate of 70-75% after lockdowns are eased. To reduce dependency on labour, SCGM will also be commissioning new machines in 2HCY21. In the near future, we believe ASPs will hold at current levels even as resin prices continue to gradually fall. We expect ASPs to gradually fall in 3QCY21 as they catch up with lower resin prices. Thus, we foresee a period of margin expansion followed by margin normalisation after ASPs eventually catch up with lower resin prices. In FY22, we believe that management will continue to focus on their high- margin products (about 75% is high-margin product of total production) by ramping up its utilisation rate. We assume SCGM’s utilisation rate to range between 65-70% in FY22, after accounting for new machinery.

(Refer overleaf for SCGM’s newly announced MoU with the University of Nottingham, Malaysia)

Increase FY22E earnings and introduce FY23E estimates. We increase FY22E revenue/CNP by 2%/12% to RM282.9m/RM37.4m to account for a higher-margin product mix. We introduce FY23E CNP of RM40.2m. Based on a 40% dividend payout policy, FY22E/FY23E DPS of 7.8 sen/8.4 sen imply yields of 3.2%/3.4%

Reiterate OUTPERFORM with new TP of RM3.02 (from RM2.62) based on FY22E EPS of 19.5 sen, using a 15.5x Fwd. PER (5-year mean excluding loss-making period). Based on FY22E EPS, the current price of RM2.45 implies Fwd. PER of 13x, which we believe undervalues the stock given: (i) robust demand for its high margin products and (ii) future expansions.

Sustainability. SCGM has entered into a MoU with the University of Nottingham (Malaysia) with the objective of exploring (i) the conversion of land-fill plastic waste to construction materials, (ii) alternative compostable raw materials to manufacture food packaging, and (iii) plastic materials to provide further impetus to develop new packaging material. While a wide range of its F&B packaging are recyclable, we believe that by continuing to innovate and exploring new solutions, these efforts are a testament to SCGM’s commitment to reducing environmental harm. The costs associated with the MoU are insignificant and the MoU does not have an impact on our current financial estimates.

Risks to our call include: (i) higher-than-expected resin cost, (ii) weaker-than-expected product demand, (iii) faster-thanexpected decline in ASPs, (iv) weaker foreign currency rates, and (v) labour shortage.

Source: Kenanga Research - 29 Jun 2021