9MFY22 CNP of RM23.1m came below our expectation (at 63% of full-year estimate) due to higher raw material costs causing margin compression. 9MFY22 DPS of 5.1 sen is also below estimate (at 67%). We cut FY22E/FY23E CNP by 17%/15% on downside risks arising from material and labour costs pressure as well as labour supply issue. Downgrade rating to MP and lower TP to RM2.34 (from RM2.80) on 13x PER on FY23E EPS of 18.0 sen.

9MFY22 below expectation. 9MFY22 CNP of RM23.1m came below our estimate (at 63% of full-year estimate). 3QFY22 DPS of 1.4 sen brings 9MFY22 DPS to 5.1 sen, below our full-year DPS of 7.6 sen.

YoY, revenue was up 17.9% thanks to the resumption of economic activities and increased sales volume of food and beverages (F&B) packaging. EBIT margin was reduced by 2.8ppt to 13.7% due to higher resin costs and other direct materials in its F&B packaging segment. The group recorded a lower CNP of RM23.1m on a higher effective tax rate of 17.9% (vs. 5.0%).

QoQ, revenue dipped by 1.7%, mainly due to lower sales contribution from its PPE segment and extrusion sheet. PBT fell 23.8% in tandem with EBIT margin mainly due to higher raw materials costs despite the fact that an increase in ASPs adjustment factored in during for quarter. All in, CNP fell by 17.1% to RM6.3m.

Outlook. We gathered that management will continue to adjust the ASPs on selective items in line with the increase in resin prices caused by the surge in crude oil prices. We believe the group’s top-line will continue to improve on the back of higher sales volume in its F&B packaging segment. This is because of heightened hygiene awareness resulting in consumer preference for high-quality food packaging. However, we are cautious that its bottom-line may be dragged down by: (i) continued rising raw materials or other direct materials prices, and (ii) higher operating costs due to labour shortage and new ruling on minimum wages. We gathered that the current utilization rate remains the same as last quarter, which is 65-70%, due to labour shortage. SCGM has purchased another automatic high-speed cutting and stacker machine to cater to its SKU which will be coming in April 2022. Thus, management guided that they have utilized 60% of their RM20m capex for FY22.

Decrease FY22E/FY23E earnings. We decrease FY22E/FY23E CNP by 17%/15%, accounting for: (i) higher raw materials costs, (i) labour shortage issue, and (iii) higher operating costs which will continue to compress margins. Based on its 40% dividend policy, we estimate FY22E/FY23E DPS of 6.3 sen/7.2 sen, implying yield of 2.9%/3.3%.

Downgraded to MARKET PERFORM with a lower TP of RM2.34 (from RM2.80) as we roll forward our valuation to FY23E EPS of 18.0 sen and an ascribed PER of 13x (from 14.7x) on 5-year mean excluding loss-making years. We believe SCGM deserves the valuation on the resilient demand for its products.

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 - 30 Mar 2022