We came away from SCGM’s analyst briefing yesterday with a view that the company will need another 6 months before seeing a full swing toward more significant improvement in its earnings. Given that resin costs have started weakening since Jan 2019 and the migration process from the old plant also complete, we think it should turn around in the final quarter. Separately, the company has also inked a Memorandum of Agreement (MoA) worth RM8.5m with Indonesian distributor PT Harapan Infiniti Mulia to exclusively manufacture degradable packaging products for the Indonesian market. Pending this recovery period, we attach a lower PE multiple of 15x (down from 20x) to FY20 EPS, resulting in a lower TP of RM1.05 (down from RM1.39). Maintain Neutral.
Hiccups. Over the last one year, the company had been plagued by numerous issues that affected its margins severely. Gross margins have shrunken from 11.5% to the current paltry level of 3.9%. Apart from the rising resin cost, the company was exposed to i) twice delays in migration from old plant to new Kulai plant, resulting in a slow pick-up in capacity utilization levels. Secondly, the new Kulai plant, which has seen an increased extrusion capacity by 73% to 62.6m kg/year, is also experiencing a slow pick-up in new orders. Given such a bigger capacity expansion, the company has had to fork out bigger upfront expenses on electricity, depreciation, labour, overheads as well as finance cost. The one-off migration cost is estimated to be around RM1m.
Relieving pressure from easing resin cost. During the 3QFY19 period, resin, which made up 60%-65% of total operating cost, had seen a rise of 10% YoY though relatively steady on a QoQ basis. We understand that it has started softening since early-2019 in tandem with lower crude oil prices. As of March, resin cost has been range bound. On a positive note, the opening of a new PET (accounting for 50% of total resin input) plant by Petronas in Pasir Gudang is expected to give some price competition to the current sole supplier in Malaysia.
Boost from Indonesian market. SCGM has inked a MoA with PT Harapan Infiniti Mulia (PT Mulia) to be exclusive producer of their in-house “Ecorasa” brand, which is expected to rake in USD2.1m (RM8.5m) lunch box sales over the next two years. Its clients include i) 260 cinema theaters, ii) Grand Hyatt hotel in Jakarta and iii) Kulina, one of the leading online catering service providers in Indonesia. PT Mulia’s management also shared his view it will jointly develop bio-degradable plastic packaging products with SCGM under the US-patented, oxo-biodegradable additive technology called “OXIUM” (Figure 3). He also guided that Jakarta has been in the forefront in pushing for eco-products as close to 90% of retail stores have already been using degradable food packaging products. He targets to expand into Surabaya, Bandung and Bali markets and plans to double its annual sales to USD4.2m by 2022.
Source: PublicInvest Research - 28 Mar 2019