9MFY21 CNP of RM26.1m came in within at 74% of our FY21E CNP of RM35.3m. 3QFY21 DPS of 2.2 sen brings 9MFY21 DPS to 5.4 sen, within at 74% of our FY21E DPS of 7.3 sen. Although recent ASP hikes have faced little resistance from customers, margin compression was seen as the higher ASPs have yet to be reflected. Lower FY21E/FY22E CNP by 7%/22% on more realistic margins. Maintain OP but lower TP to RM2.62 (from RM3.85) on 15x PER (5-year average excluding loss-making period) on FY22E EPS of 17.5 sen.

9MFY21 within expectation. 9MFY21 CNP of RM26.1m came in within at 74% of our FY21E CNP of RM35.3m. 3QFY21 DPS of 2.2 sen brings 9MFY21 DPS to 5.4 sen, within at 74% of our FY21E DPS of 7.3 sen.

YoY, revenue rose 12.4% to RM180.8m (from RM160.8m) due to higher deliveries of F&B packaging and the commencement of contribution from Personal Protective Equipment (PPE) segment. PBT rose 173% to RM27.3m thanks to improved sales mix, lower resin costs, lower operating expenses, and lower interest expense. We note that due to the above, PBT margin also improved from 6.2% to 15.1%. Consequently, CNP rose 155% to RM26.1m (from RM10.2m).

QoQ, revenue rose 2.5% to RM62.5m (from RM61m) on improved F&B sales to the local market. However, EBIT fell 25% due to higher resin costs and one-off costs, including ~RM0.5m incurred to respond to its Covid-19 positive staff. As the Group enjoyed a tax income, its PAT only fell 16%. After stripping out non-recurring items, CNP came in at RM6.6m, down 34%. Note that margins have also fallen across the board with EBIT margin falling 5.1ppt to 13.8% and CNP margin falling 6.1ppt to 10.6%. We believe that SCGM faced margin compression in 3QFY21 as the rise in ASPs was not reflected yet.

Outlook. Moving forward, we believe that SCGM is able to pass on higher costs as management has indicated that despite raising ASPs, there is little resistance with no decrease in orders from customers. We believe that management will continue to focus on producing high- margin (mid/high-teen) customised F&B products by improving utilization rate over increasing capex in FY22.

Signs of flattening resin prices. In our view, resin prices could peak some time in 2QCY21. Our channel checks indicate that resin suppliers are guiding flat prices for April, as US petrochemical plants are ramping up production post the deep freeze. That said, resin prices are likely to remain elevated for some time as the months-long disruption has left deep deficits throughout the global supply chain. For SCGM, our FY21 resin assumption remains intact at USD1,000/MT as this includes the trough resin prices in May 2020. We raise our FY22E resin assumption for SCGM from USD1,000/MT to USD1,200/MT.

Post results. We lower FY21E/FY22E CNP by 7%/22% to RM32.9m/RM33.5m from RM35.3m/RM42.8m. While we only tweaked FY21E revenue down by 2.5% (to RM238m), the downward revision was mainly from the lowering of our overly-optimistic margin assumptions. We lowered our FY21E/FY22E EBIT margin assumptions from 19%/20% to 16%/15% (9MFY21: 16%) and CNP margin assumptions from 15%/16% to 14%/12% (9MFY21: 14%). Consequently, based on a 40% pay-out ratio, we revise our FY21E/FY22E DPS down to 6.9 sen/7.0 sen from 7.3 sen/8.9 sen, implying yields of 3.7%/3.8%.

Maintain OUTPERFORM on lower TP of RM2.62 (from RM3.85) as we roll forward our valuation to FY22E EPS of 17.5 sen, using a 15x Fwd. PER (5-year mean excluding loss-making period), lowered from previous 19x, which was +0.5SD 5-year mean. Based on the FY22E EPS, the current price of RM1.86 implies Fwd. PER of 10.6x, which we believe under-estimate SCGM’s ability to pass on higher costs.

Source: Kenanga Research - 30 Mar 2021