9MFY20 CNP came above our expectation at 100% of our full-year forecast on better-than-expected EBIT margins and lower-than-expected tax rates, despite top-line coming in below at 62%.The 9MFY20 dividend of 1.75 sen is also above estimate (88%). All in, we increase FY20-21E CNP by 44-37% to RM13.8-19.4m on better margins assumptions. Maintain MP but on a lower TP of RM1.40 based on PBV of 1.47x (from RM1.60).

9MFY20 CNP above expectation on better margins. 9MFY20 CNP of RM9.7m is above our expectation at 100% of FY20E CNP mainly due to higher-than-expected EBIT margin of 8.6% vs. our assumption of 6.6%, and tax income of 4% vs. our expectation of effective tax rate of 15% for FY20. This is despite a weaker-than-expected top-line which only came in at 62% of our estimate. 9MFY20 dividend of 1.75 sen also came above (88%) on the higher-than-expected earnings.

Results’ highlight. QoQ, top-line was down by 4% on lower local sales from non-customised F&B products as well as electronics. However, bottom-line was up by 7% to RM3.7m (from RM3.5m) primarily on tax income of RM0.5m (vs. a tax expense of RM0.1m in 2Q20). YoY-Ytd, top-line was down by 5% due to similar reasons mentioned above. However, EBIT was up by 93% on an improved sales mix and lower raw material cost. All in, CNP was up by 414% to RM9.7m due to tax income of RM0.4m (vs. tax expense of RM1.1m of 36% effective tax rate).

Outlook. SCGM is focused on improving operational efficiency through increased automation to achieve better economies of scale from its new factory, and improve product margins via more customisable products going forward. The group will focus on increasing its sales of F&B packaging in both the local and export markets and aims to introduce more degradable and biodegradable plastic packaging products. However, given the challenging market landscape in light of Covid-19, the group is operating at 50% production capacity during the Restricted Movement Order (RMO) (vs. 65% in Jan 2020). SCGM has also introduced face shield mask for medical personnel since Feb 2020.

Increase FY20-21E CNP by 44-37% to RM13.8-19.4m on better margins. All in, we have lowered our top-line estimates by 17-8% for FY20-21 in light of slower operations and weaker demand during the RMO period to be partly offset by new product contribution (face shield which we estimate could contribute c.RM18m in sales p.a.). But we increase CNP margin to 6.5-6.7% in FY20-21E (vs. 3.7-4.6%) as we increase margins on higher margin products going forward and lower effective tax rate to 10-16% (from 15-18%). FY20-21E dividends are based on a 40% payout ratio of 2.9-4.0 sen, implying 2.1-2.9% yield.

Maintain MARKET PERFORM but with a lower TP of RM1.40 (from RM1.60). Our TP is derived after applying a PBV multiple of 1.47x (- 1SD to its 5-year histprical average) from 1.66x previously on our revised FY21E BVPS of RM0.97 (from RM0.95). Although results were above expectation, we maintain our conservative PBV valuations as this is only the third quarter of positive earnings for SCGM and given the current tough market conditions where earnings stability remains a concern in light of Covid-19 (i.e. supply chain and demand disruptions), prompting us to remain cautious on the sector. We will look to switch our valuation method back to PER upon more consistent earnings deliveries going forward.

Risks to our call include: (i) lower or higher-than-expected resin cost, (ii) higher product demand from overseas market, and (iii) stronger or weaker foreign currency rates.

Source: Kenanga Research - 31 Mar 2020