SCGM Bhd is Malaysia’s leading thermo form plastic packaging manufacturer with end to end production from design extrusion to packaging and delivery. The company serves clientele in the F&B, medical, electrical and electronics, and PPE sectors in Malaysia and around the world. SCGM’s manufacturing facility is located in Kulai Johor supported by a strong workforce of 600 people. Driven by increasing demand in F&B packaging, the company is undergoing an expansion plan with additional capacity of 30%-50% scheduled to be completed in early CY2022. We expect SCGM to register net earnings of RM35.6m and RM37.0 for FY4/22 and FY4/23 respectively. BUY with a target price of RM3.08 based on 16x (3- years average) over FY4/23 EPS.

SCGM has been expanding its production capacity and increasing automation due to growing demand of F&B packaging. The company’s automatic stretch film wrapping which commenced operation in middle of CY2021 provides greater automation and increases wrapping speed from 10mins/pallet to 5mins/pallet.

The company also plans to install 2 units of automatic high speed cutting and stacker machine. The first unit was installed in Sep 2021 while second unit is expected to be commissioned by Feb 2022. Eventually, the company’s cutting and stacking capacity will be increased from 72,000 units/day to 158,000 units/day.

Meanwhile the automatic packing machine is expected to commence operation in January 2022 hence will increase the company’s packing capacity from 600k units/day to 800k units/day.

SCGM is able to increase selling prices to mitigate the increasing raw material costs. On the other hand, the company’s utilisation rate is currently running at about 65%-70% as compared with 55%-60% during MCO. With higher utilisation rate, we believe earnings will improve in 2HFY22.

We expect SCGM to register net earnings of RM35.6m and RM37.0m for FY4/22 and FY4/23 respectively. The company has a dividend policy of minimum 40% payout ratio from its net profit. Based on our estimate, SCGM is expected to pay 7.4 sen and 7.7 sen for FY22 and FY23 respectively, translating into yields of 3.3% and 3.5% respectively.

Our BUY recommendation is premised on: (i) increasing demand of F&B packaging; (ii) additional capacity to boost future earnings; and (iii) decent dividend yields.

Source: Rakuten Research - 13 Jan 2022