We attended a conference call yesterday hosted by SCGM’s management with more guidance on the newly-established healthcare protection gear business obtained. With a relatively small capital expenditure (capex) of RM1m, production of the face shields and face masks can potentially generate up to RM4m in sales per month despite the manufacturing plant only operating at a maximum utilization level of 50% during the Movement Control Order (MCO) period. Meanwhile, the company is likely to see huge savings from resin costs in the coming months given the current low oil prices, which will further translate into margin expansion for the Group. Maintain Trading Buy call with an unchanged TP of RM2.20.

• More room for resin price to fall. In 3QFY20, resin cost softened by 19% YoY and 20% QoQ. The spot price for Southeast Asia polyethylene has been holding around USD850-900/mt, still considerably lower than its recent 10-year peak of USD1,680/mt in 2013. Given the recent collapse in oil prices to the lowest levels since Nov 2002, resin cost, which makes up nearly 60% of the Group’s operating cost, will also drop subsequent to the softer oil price movements. It is worth noting that the Group is holding up to three weeks resin stocks and currently only adopts spot purchases which will see it benefitting from the cheaper resin cost immediately. Our sensitivity analysis shows that for every 10% decline in resin cost, it will potentially bring down the Group’s operating expenses by about 6%.

• A timely investment. Since Feb 2020, the company has allocated RM1m in capex to purchase 5 new ultrasonic sealing machines for face shields and one new face mask machine. The face shield machines can produce up to 21k units/day while the face mask machine, which will arrive by mid April, has the capacity to produce up to 50k pieces/day. Despite having no contractual agreement for the orders, the Group is currently sitting on 1 month of backlog orders. It mainly supplies to all local hospitals and pharmacies. Since 18 Feb, the Group has recorded sales of RM2.9m from the face shields. Given the minimal investment cost, we see attractive double-digit profit margins from this new business segment. As of now, we have not imputed the new earnings contribution into our FY20-22 earnings projection as yet.

• Robust demand from F&B packaging products. Implementation of the MCO by various countries due to the Covid-19 pandemic has driven up demand for its customized F&B packaging products, namely, ready-to-eat trays, meat trays and salad bowls.

• Manageable operations during MCO period. The company has no issues with the raw material as it has sufficient resin stocks. In fact, resin production is uninterrupted given its essential status. It also has little logistics issue given the restricted movements.

Source: PublicInvest Research - 1 Apr 2020