Impressive price rally in three months. Recall that on 1 April 2014, we advocated a Trading Buy call on SCGM (TP: RM1.54 based on 10.0x FY15E EPS back then) when its share price was at RM1.12. Since then, it has surged outstandingly by 85.7% to RM2.08, which clearly outperformed both the benchmark FBM Small Cap Index (+7.07%) as well as the FBMKLCI (+2.27%) over the same period.

Robust FY14 result. SCGM reported a strong FY14 NP of RM11.5m (+45.0% YoY), which was slightly ahead of our full-year NP estimate of RM11.4m. The inspiring results were mainly supported by: (i) stronger operational margin due to stable commodity prices, (ii) consistent production efficiency, and (iii) stronger demand from both domestic and export markets.

Production ramp-up for the thermoplastic cup amid factory expansion to be the key catalyst moving forward. SCGM’s mid-term earnings prospects remain resilient, mainly driven by its new factory expansion that would cater for production of the new thermoplastic cup (PPC) products. The new plant is expected to be operational by November this year and improve its sales volume by c.10% annually. The higher sales capacity coupled with a better economy of scale are expected to drive SCGM's earnings higher and we forecast net profits of RM12.8m (+11.3% YoY) in FY15 followed by RM14.6m (+14.1% YoY) in FY16.

Introduced dividend payout policy of minimum 40%. Despite not having an official dividend policy in place, SCGM has been consistently rewarding its shareholders with annual dividend per share (DPS) ranging from 2.5 to 5.1 sen (implied a dividend payout ratio (DPR) of 30% to 43%) since FY10. With the new dividend payout policy of at least 40% DPR, we estimate that the Group could declare a DPS of 6.4 sen in FY15 and 7.3 sen in the following year, based on a conservative 40% DPR assumption.

Valuation appears rich at the current level. SCGM is currently trading at a forward PER of 13.0x, at a 5.7% premium to the FBM Small Cap forward PER of 12.3x and 30.0% premium to Great Wall Plastic’s acquisition valuation of 10.0x PER. Although earnings prospects remain resilient, its current valuation appears stretched, in our view. Even after we rolled over our valuation base year to FY16E, our SCGM’s fair value only can be revised up to RM2.18, based on a targeted forward PER of 12.0x (in-line with the current FBM Small Cap forward PER). In view of the limited capital upside from here, we advocate investors to take profit for now and re-visit the stock when its valuation becomes appealing again.

Source: Kenanga