SCGM Bhd
(Sept 25, RM1.07)
Maintain underperform with a higher target price (TP) of 84 sen: After two straight loss-making quarters, SCGM Bhd finally saw a turnaround in the first financial quarter ended July 31, 2019 (1QFY20) as earnings doubled to RM2.2 million, bolstered by capital allowance and lower resin prices.

Top-line growth was relatively flat. The results were in line with our full-year earnings forecast, though beating street expectations, making up 43%.

A dividend per share of 0.25 sen was declared for the quarter.

Despite the strong results, we keep our estimates unchanged as we still deem it a letdown as sales failed to grow despite an increased extrusion capacity by 64.9% to 67.6 million kg following the commencement of its new Kulai plant.

We continue to rate SCGM with an “underperform” call but with a higher TP of 84 sen (up from 69 sen) after rolling over our valuations to FY21.

Group sales were steady at RM55.6 million as an increase in local demand (+1.4%) for plastic packaging products was partly offset by weaker export sales (-3.6% year-on-year [y-o-y]).

Almost 82% of sales were contributed by the food and beverage segment.

The strong earnings were mainly attributed to a decline in operating expenses, down 1.4% y-o-y, as resin prices dropped.

Besides that, the company also benefitted from lower tax expenses due to the utilisation of capital allowances.

The low capacity utilisation rate remains a key concern. We believe the company’s current utilisation rate is steeply below the optimal utilisation rate as there was no sales growth during the quarter despite the extrusion capacity jumping by 64.9% y-o-y to 67.6 million kg.

It needs to intensify its efforts to increase its sales orders as well as its customer base.

Fundamentally speaking, it will be relatively tough to improve the bottom line without any sales growth as the issue of rising costs will continue to persist.

The company’s net gearing level fell from 63% to 58.8% (with a net debt of RM93.2 million) after making a debt repayment of RM11.4 million during the quarter. — PublicInvest Research, Sept 25