KUALA LUMPUR (May 10): SCGM Bhd's proposed disposal of its core plastic packaging business for RM544.38 million is deemed to be a good opportunity to unlock the value.

Analysts see SCGM's proposed divestment a good deal considering the offer price is at a premium over its last traded market price.

Rakuten Trade Sdn Bhd vice-president of equity research Thong Pak Leng was surprised by the move.

The analyst, who tracks the company, suggested the existing shareholders hold on to their shares until further notice on the company's future direction.

"The disposal price (around RM2.80) is about 22% premium of its closing price of RM2.29 on Tuesday which is a good deal. I believe the shareholders can expect to receive more dividends if they cannot identify any new business in the future," he said.

In a filing with Bursa Malaysia, SCGM said the board intends to maintain the listing status of the company. It will look out for new core business to sustain its ongoing concern after the divestment.

SCGM has earmarked some RM84 million, which is equivalent to 43 sen per share, for acquisitions of new business or assets to be identified or working capital within 24 months.

When contacted, Kenanga Research analyst Tan Jia Hui said the sale of a 100% stake in Lee Soon Seng Plastic Industries offers a timely exit for shareholders at a time when profit margin has shrunken to single digits — a level that has not been seen since the outbreak of Covid-19 pandemic — hit by higher costs and unfavourable product sales mix.

The company's profit margin narrowed to 8.8% in the third financial quarter ended Jan 31, 2022 (3QFY22) compared with 10.8% in the immediate preceding quarter 2QFY22, and 13% a year ago.

The last time it had a single-digit profit margin was two years ago, which stood at 8.1% for 3QFY20.

SCGM's net profit fell by nearly 20% quarter-on-quarter to RM6.28 million — the lowest since 3QFY20 when it posted net profit of RM4.18 million — versus RM7.83 million in 2QFY22. However, quarterly revenue was down by a marginal 1.69% from RM72.54 million.

On a year-on-year basis, its net profit shrank by 22.5% to RM6.28 million from RM8.1 million, despite posting a higher revenue of RM71.31 million, compared with RM62.53 million a year before.

The group attributed the earnings contraction to higher prices of resin, additives, chemicals and packaging.

Kenanga's Tan is expecting SCGM's margin squeeze to continue, at least in the near term, amid high input costs. She is forecasting a lower annual net profit of RM30.5 million for the financial year ended April 30, 2022 (FY22), versus RM33.6 million in FY21.

Tan maintained its "market perform" recommendation and target price of RM2.53.

SCGM announced on Monday it had sealed a conditional share sale agreement to sell its core plastic packaging business to two Japanese firms, Mitsui & Co and FP Corp, for RM544.38 million cash.

Upon completion of the sale, SGCM will distribute RM425.56 million to its entitled shareholders within nine months. The proposed distribution entails capital reduction and repayment of 36 sen per share, and proposed special dividend of RM1.85 per share. In total, shareholders will receive RM2.21 per share.

The disposal price of RM544.38 million represents an implied price-earnings ratio of 16.03 times based on profit after tax of approximately RM33.95 million in FY21.

Meanwhile, SCGM is expected to record a net gain on disposal of roughly RM393.69 million.

At the close of Tuesday, share price of SCGM fell nine sen or 3.78% to RM2.29, bringing it a market capitalisation of RM443 million.

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SCGM shareholders to receive RM2.21 dividend per share after sale of core business for RM544 million