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SCGM Berhad (SCGM, 7247) - Right Place, Right Time

We came away from our con call with management feeling assured that the Group is making the right strides during the Covid-19 pandemic - acquiring two face mask machines and also looking to acquire eight thermoforming machines by 4QCY20. All in, we expect CNP to increase by 49-63% in FY21-22 to RM31.4-38.6m. Maintain MARKET PERFORM but increase TP to RM3.45 (from RM1.90) post switching to PER valuation based on 19x CY21/22 EPS of 18.2 sen.

Growing top-line with additional face mask and thermoform machines. SCGM is purchasing two face mask machines for RM350k which we estimate could contribute c.RM6.5-9.8m to FY21-22E CNP. Additionally, the group is planning on acquiring eight additional thermoforming machines which we estimate could contribute c.RM1.5- 4.5m to CNP in FY21-22. The eight thermoforming machines is expected to arrive gradually in September and post commissioning, we expect contributions mostly in FY22E.

Focused on the right segments, expect product demand to remain strong. Demand for face mask should remain strong given the recent pick-up in the number of Covid-19 cases in Malaysia, and the mandatory requirement for all Malaysians to use face mask beginning 1st August 2020. Additionally, the group also secured approval from Kementerian Perdagangan Dalam Negeri Dan Hal Ehwal Pengguna on 28 July 2020 to export 50% of its face masks produced by it and its subsidiary to Singapore. Demand for the group`s F&B products is also strong in light of the pandemic as the new thermoforming machines will be utilized for the production of lunchboxes which has picked up during the MCO phases. However, the its plastic cup business has been weak in recent months.

Bumping up the margins. SCGM will focus on increasing sales of F&B packaging which is its primary product, while its PPE and face mask business since Feb 2020 will serve as a sweetener for better margins going forward. Additionally, the group will be working on improving operational efficiency through increased automation to achieve better economies of scale from its new factory, and improve product margins via more customisable as well as higher margin products going forward. As such, we increase CNP margins to 13.1- 14.2% in FY21-22 (from 9.3-9.6%) from better product mix.

All in, we increase FY21-22E CNP to RM31.4-38.6m (up by 49-63% in FY21-22E) from better product mix as face mask should be able to command higher margins vs. existing products. FY21-22E dividends are based on a 40% payout ratio of 6.5-8.0 sen, implying 1.8-2.2% yields.

Maintain MARKET PERFORM but increase TP to RM3.45 (from RM1.90) upon switching to PER valuation method (from PBV of 2.0x @-0.5SD on its 5-year historical average on FY21E BVPS of RM0.95) as the group had previously faced loss-making quarters in FY18-19. Our TP is based on 19x PER to its FY21/22 EPS of 18.2 sen to encapsulate the bulk of new contributions which will be coming in FY22. Given strong expectations of profitable quarters going forward and stronger margins from its face mask business, and stronger demand for its F&B products which remains a formidable segment during the Covid- 19 pandemic, we are comfortable with our new valuation method which is at +0.5SD to its 5-year historical average (excluding loss-making period). We are comfortable with our call given its strong share price momentum of (+125% YTD).

Source: Kenanga Research - 5 Aug 2020

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