SCGM’s 1HFY19 earnings tumbled 75% YoY to RM2.6m, making up only 24% and 31% of our and consensus expectations as operating cost continued to grow exponentially while finance cost jumped 4-fold due to higher gearing level (up from 0.48x to 0.66x). Despite the disappointing results, we keep our earnings forecasts unchanged as we think the worst period is over for the company. We are expecting a sharp catch-up in the company’s earnings for 2H. A lower DPS of 0.5sen (vs 1.5sen for 2QFY18) was declared for the quarter. Maintain our Neutral call but with an unchanged TP of RM1.39.
2QFY19 driven by strong local demand. Group sales rose 10.2% YoY to RM57.4m in 2QFY19 on the back of stronger plastic packaging product demand from local market (+16.8% YoY) while export sales remained steady. It is also the first double-digit sales growth registered since 3QFY17.
Company updates. The transition of the group’s core operations from the old plant to the new headquarters in Kulai is currently underway and is targeted to be fully operational by 3QFY19.
Expecting better results in the coming quarters. Given the sharp decline in oil prices since Oct, down by more than 30%, we believe it would help ease the pressure on resin cost, which made up 70% of their operating cost. It is worth nothing that the company does not adopt a hedging policy for resin materials, indicating that it will fully benefit from the cheaper resin cost immediately. Apart from that, full operations of the new factory, which will see extrusion capacity jump from 36m/kg to 62.6m/kg will definitely bump up the group’s production volume and improve the economies of scale in the coming quarters. It currently houses 31 units of thermoforming machines and 15 units of extrusion machines.
Source: PublicInvest Research - 14 Dec 2018
https://klse.i3investor.com/blogs/PublicInvest/186602.jsp
