1HFY22 CNP of RM16.3m came below expectation, making up 42% of our FY22 estimate. YoY, SCGM recorded higher 1HFY22 revenue but failed to sustain margins due to Covid-19 related expenses and higher raw material costs. 1HFY22 DPS of 3.7 sen came within our expectation. We decrease FY22E CNP by 5% on the back of the labour shortage issue which we believe will affect its earnings in the subsequent quarters. Maintain OP with lowered TP of RM2.80 (from RM2.97) based on FY22E EPS of 19.1 sen at 14.7x PER.

1HFY22 below expectation. 1HFY22 CNP of RM16.3m came below, at 42% of our estimate. 1HFY22 dividend of 3.7 sen is within, at 46% of our FY22E DPS of 8.1 sen.

YoY, 1HFY22 revenue grew by 20% mainly driven by higher sales volume of its F&B packaging, and higher contribution on PPE segment from the local and Singapore markets. Despite higher revenue and lower finance cost, EBIT was dragged by 0.5% due to higher raw material costs. All in, CNP fell by 16% on a higher effective tax rate of 18.4% (vs. 1HFY21: 8%).

QoQ, despite the production disruption from 1 June to 27 September, 2QFY22 revenue rose 4.7% to RM72.5m thanks to a higher sales volume of food packaging and extrusion sheet to new customers. PBT dipped by 0.1%, likely due to: (i) higher raw material costs, (ii) labour expenses, (iii) loss on foreign exchange, and (iv) Covid-19 compliance cost and vaccination expenses. Taking into account non-recurring items such as Covid-19 vaccination expenses of RM0.3m and reversal of inventories, CNP fell by 0.3% to RM8.2m.

Outlook. Resin prices had increased since July due to electricity disruption in China and the freight issue. We believe SCGM can pass on the higher costs by raising ASPs. Moving forward, SCGM will continue to focus on its food packaging segment to achieve a more favourable and higher-margin product mix. We gathered that SCGM’s utilization rate is at 65-70% (vs. 55-60% during MCO) to fulfil its backlog orders. We continue to like SCGM for resilient demand for its products yet being cautious on delivery of orders due to labour shortage.

Decrease FY22E earnings and maintain FY23E earnings. We decrease FY22E revenue/CNP by 3%/5% to RM283.6m/RM36.7m to account for labour shortage issue which will adversely affect sales volume in the subsequent quarters, and on higher administrative costs. Referring to its 40% dividend policy, we estimate FY22E/FY23E DPS of 7.6 sen/8.5 sen, implying 3.1%/3.5% yield.

Reiterate OUTPERFORM with lowered TP of RM2.80 (from RM2.97) based on FY22E EPS of 19.1 sen and an ascribed PER of 14.7x (5-year mean excluding loss-making period). We believe SCGM deserves the valuation for resilient demand for its products, and better product mix.

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 Dec 2021