SCGM posted its first ever quarterly loss since listing, with RM0.7m reported in 3QFY19. The unexpected loss was attributed to an increase in i) depreciation cost (+17% YoY), ii) finance cost (+252% YoY), iii) resin cost as well as one-off migration cost in FY19. For the cumulative 9 months, earnings shrank 87% YoY to RM2m. Given the weaker-than-expected results, we slash our FY19 earnings forecasts by 41% but we keep our FY20-21 numbers unchanged as we see stronger margins, led by i) improved capacity utilization in its new Kulai plant and ii) lower resin cost going forward. We expect to see a strong comeback in the final quarter. No dividend was declared for the quarter. Maintain our Neutral call with an unchanged TP of RM1.39.

• 3QFY19 driven by strong local demand. Group sales climbed 4.1% YoY to RM55.6m in 3QFY19 on the back of stronger plastic packaging product demand from the local market which improved by 5.9% YoY to RM36.3m. Export sales remained steady at RM19.3m. Local sales commanded 65% of total sales. Food and beverage (F&B) continued to dominate group sales, making up 81% of its product mix.

• Bottomline hit by a combination of factors. The company slipped into the red in 3QFY19 for the first time since 2008. The loss was contributed by an increase in i) depreciation cost (+17% YoY), ii) finance cost (+252% YoY), iii) resin, iv) utilities as well as one-off migration cost in FY19. It is worth noting that the net gearing has leaped from 42% to 65.5%.

• Company updates. The migration progress has reached 97% and the new Kulai plant is expected to be fully commissioned by 4QFY19. As of today, the new plant is running at 50% utilization rate and is expected to be ramped up further once the migration is complete. Given its established profile in F&B segment, the Group is targeting more F&B customers from the local and ASEAN markets especially Indonesia.

• Seeing silver lining. Despite the various hiccups and poor results, we expect to see a strong comeback in the final quarter, riding on the weaker resin cost, improved utilization rate and significantly-lesser migration cost following completion of its move.

Source: PublicInvest Research - 27 Mar 2019