1QFY22 CNP of RM8.2m and DPS of 2.0 sen came in within our expectations at 22% and 25% of our full-year estimates, respectively. We increase our FY22E-FY23E net profit by 2- 3% on the back of capacity expansion and new products in the pipeline. Reiterate OP with a higher TP of RM3.13 at 15.5x PER on FY22 EPS of 20.2 sen.

1QFY22 within expectation. 1QFY22 revenue/CNP of RM69.3m/RM8.2m came within at 24%/22% of our full-year estimate. FY22 DPS of 2.0 sen is within our FY22E DPS of 7.7 sen.

YoY, revenue rose 21.1% to RM69.3m (from RM57.2m) on the back of higher sales volume of food packaging and PPE segment, driven by takeaway packaging and face masks. Operating profit rose by a lower 9.6% due to a lower operating margin, likely weighed by the higher resin cost compared to the same period last year. With a higher effective tax rate of 16.1% (vs. 1QFY21’s 4.7%), the higher tax expense weighed on net income which rose by a marginal 0.3%. After taking into account one- off items of written down inventories and reversal for impairment of receivables, core net profit fell by 13%.

QoQ, despite SCGM operating under the 60% workforce capacity limit from 1 June to 27 September, revenue rose 5.4% from RM65.7m to RM69.3m driven by higher sales volume from the F&B packaging and PPE segments. However, higher raw material costs (as they continued to use old inventory, which is at a higher cost), and higher administration costs and Covid-19 compliance costs also weighed on operating margin (15.2% vs 4QFY21 15.9%), with operating profit rose by a relatively lower 1%. Due to the lower effective rate, which was from unused reinvestment allowance and lower deferred tax expenses, net profit rose by 9%. Taking into account non-recurring items of reversal of inventories and impairment of receivables, CNP rose by 3.2%.

Outlook. Despite the resin prices’ downtrend, we continue to believe that ASPs have stabilized, supported by resilient consumer demand and disrupted logistics that have kept resin supply tight. SCGM continued to expand their capacity by purchasing more automatic thermoforming machines (coming in 4QCY21 and 1QCY22), which we believe will allow SCGM to continue expanding output while increasing efficiency and improving product quality. Management has guided that they have utilized 40% of their RM20m capex for FY22 with a total purchase of 11 machineries, which we have already accounted for in our estimates. Moving forward, SCGM will continue to expand its capacity to meet the robust demand from both local and export markets, as well as to cater to the demand for their new premium packaging products for the export market. For its PPE segment, SCGM has introduced new face masks (KN95 and KF94) for the local market, which we believe will boost the sales of the PPE segment. All in, we continue to like SCGM’s future prospects, premised on: (i) continued robust demand for its products, shown by its high utilization rate of 70-75% (back to pre-MCO level), and (ii) new packaging products in the pipeline, which we think should start contributing in FY22.

Increase FY22E/FY23E estimates. We increase FY22E revenue/CNP by 3% each to RM292m/RM38.6m. We also raise FY23E revenue/CNP by 11%/2% to account for the higher sales, boosted by the new products, but at a lower net margin, as we account for a higher effective tax rate. Based on their 40% dividend policy, we estimate FY22E/FY23E DPS to be 8.1 sen/8.6 sen, implying decent 3.2%/3.4% yields.

Reiterate OUTPERFORM with new TP of RM3.13 (from RM3.02) based on FY22E EPS of 20.2 sen and an ascribed PER of 15.5x PER (5-year mean excluding loss-making period). Based on FY22E EPS, the current price of RM2.51 implies Fwd. PER of 12.5x, which we think is undervaluing SCGM given its: (i) robust demand from export and local markets, (ii) capacity expansion for higher-margin packaging products and (iii) expansion of product portfolio.

Risks to our call include: (i) higher-than-expected resin cost, (ii) weaker-than-expected product demand, (iii) weaker foreign currency rates, and (vi) labour shortage.

Source: Kenanga Research - 29 Sep 2021