After our recent check with management, we maintain our bullish view on SCGM. ASPs are remaining elevated on resilient demand amid fluctuation in resin prices. Once our economy reopens, we expect the robust demand for SCGM’s products to remain, driven by continued desire for takeaways and heightened hygiene awareness. We reiterate our OUTPERFORM call with unchanged TP of RM3.02 @ 15.5x PER on FY22 EPS of 19.5 sen.

Resin prices and ASP. Despite resin prices being on a downtrend, there are increases of 2-8% in PP and PET prices since July. This is likely due to the resilient consumer demand and disrupted logistics, which continued to keep resin supply tight. In the near term, we expect PET/PP resin prices to remain relatively unchanged at the current level of USD1,100/MT to USD1,250/MT. We forecast SCGM’s CY21 average resin cost to be USD1,000/MT-USD1,100/MT (vs. YTD average of USD1,200/MT). SCGM is maintaining its elevated ASPs due to recent fluctuation in resin prices.

Capacity expansion. SCGM has utilized 30% of their FY22E RM20m capex. Management guided that their automation machines, which will be coming in 4QCY21, should help to relieve part of their labour shortage issue and the 60% workforce limit during the packaging progress. Moving forward, management will continue to purchase other machineries to increase their capacity as the current utilization rate is 75-80% (vs. pre-MCO level of 65- 75%), a level deemed as near-full capacity.

Robust demand. From our understanding, the lockdowns and resurging cases have boosted orders for SCGM’s F&B packaging and PPE. Recently, SCGM has introduced a new face mask for the local market. This premium quality face mask will also fetch a higher margin for the group. Once the economy re-opens or when Phase 1 of the national recovery plan is lifted, we believe demand will remain robust on: (i) continued consumer preference for takeaways and ready-to-eat meals, (ii) heightened hygiene awareness, thus desire for high-quality food packaging in supermarket and bakeries, and (iii) continued demand for face masks amidst this pandemic. Thus, we remain optimistic that SCGM will be able to deliver resilient earnings in their upcoming result (1QFY22).

Workforce’s vaccination rate. Management guided that 30% of their workforce has completed their vaccination and the rest will be fully vaccinated by end of August 2021. The group is currently operating with only 60% of its workforce. According to the new restriction on workforce capacity, SCGM most probably can resume to 100% workforce in September 2021 and be able to increase their productivity to fulfil the robust demand for its products.

Maintain FY22E/FY23E earnings. We maintain our FY22E revenue/CNP of RM282.9m/RM37.4m. We also maintain our FY23E revenue/CNP of RM296m/RM40.2m. FY22E/FY233E DPS of 7.8 sen/8.4 sen, implying yield of 3.3%/3.4%.

Reiterate OUTPERFORM with unchanged TP of RM3.02 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 12x, which we believe undervalues SCGM, given: (i) the continued robust demand for its high margin products, and (ii) forthcoming capacity expansion for its plastic packaging segments.

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 - 25 Aug 2021