PublicInvest maintains neutral on SCGM, TP at RM1.39
KUALA LUMPUR: SCGM Bhd 
's earnings results for 3QFY19 are unlikely to be unfavourable as falling oil prices will not have affected its operating costs due to the lag effect at Lotte Chemical's level, says PublicInvest research.
However, the results are still expected to be affected a rise in depreciation and resin costs, it said in a morning note.
's earnings results for 3QFY19 are unlikely to be unfavourable as falling oil prices will not have affected its operating costs due to the lag effect at Lotte Chemical's level, says PublicInvest research.However, the results are still expected to be affected a rise in depreciation and resin costs, it said in a morning note.
SCGM's 3QFY19 results are expected to be announced on March 26.
According to the research house, SCGM is looking to diversify into more overseas markets given its larger capacity from its new plant in Kulai, which has been operational for about eight months.
As of 1HFY19, export markets accounted for 33.3% of group sales, targeting vegetable, fruit and confectionary segments due to their defensive nature.
\"The new Kulai plant, which expands the total extrusion capacity from 41m kg/year to 67.6m kg/year, has reached 50% utilisation rate.
\"With the increased automation as well as larger power supplies, there will be lots of room to achieve greater economies of scale and margin improvements going forward,\" said PublicInvest.
The group's old plant in Kulai, meanwhile, is slated for disposal for not less than RM70mil upon the completion of the migration process.
PublicInvest noted that resin cost, which accounts for 70% of operating costs, has been on a gradual downtrend since oil prices corrected over 22% after hitting US$84.80 in October 2018.
It said PP is expected to face more competitive pricing from Petronas following the soon-to-be-completed Pengerang downstream project as Petronas resin capacity outweighs Lotte Chemical's.
PET, which made up about 40% of the Group’s total resin usage, will see a surge of supply from its main supplier, MPI Polyester Industries following the opening of a new production plant
in Vietnam, it added.
\"We believe the Group would be able to ride on recent lower resin cost in 4QFY19 as it adopts a spot-pricing policy for resin orders, which is up to 1 month only.\"
The research house maintained its neutral call on SCGM with an unchanged target price of RM1.39.
According to the research house, SCGM is looking to diversify into more overseas markets given its larger capacity from its new plant in Kulai, which has been operational for about eight months.
As of 1HFY19, export markets accounted for 33.3% of group sales, targeting vegetable, fruit and confectionary segments due to their defensive nature.
\"The new Kulai plant, which expands the total extrusion capacity from 41m kg/year to 67.6m kg/year, has reached 50% utilisation rate.
\"With the increased automation as well as larger power supplies, there will be lots of room to achieve greater economies of scale and margin improvements going forward,\" said PublicInvest.
The group's old plant in Kulai, meanwhile, is slated for disposal for not less than RM70mil upon the completion of the migration process.
PublicInvest noted that resin cost, which accounts for 70% of operating costs, has been on a gradual downtrend since oil prices corrected over 22% after hitting US$84.80 in October 2018.
It said PP is expected to face more competitive pricing from Petronas following the soon-to-be-completed Pengerang downstream project as Petronas resin capacity outweighs Lotte Chemical's.
PET, which made up about 40% of the Group’s total resin usage, will see a surge of supply from its main supplier, MPI Polyester Industries following the opening of a new production plant
in Vietnam, it added.
\"We believe the Group would be able to ride on recent lower resin cost in 4QFY19 as it adopts a spot-pricing policy for resin orders, which is up to 1 month only.\"
The research house maintained its neutral call on SCGM with an unchanged target price of RM1.39.
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