SCGM Berhad (Not Rated)

Transcription

1 SCGM Berhad (Not Rated) Great package deals Highlights Catalysts Risks Forecasts - A one stop leading thermo-vacuum formed plastic packaging manufacturer SCGM manufactures and sells its thermos-vacuum formed plastic products to local market as well as exports to 20 countries. New expansion on pla stic cups Since SCGM see great potential of plastic cups at Pasar Pagi/Malam markets, SCGM has commissioned its new plastic cup production line in March The Group expects its revenue to grow by 7% to 8% yoy for FY16. Going forward, this new products has the potential of contributing RM20m revenue per year or 18.6% of FY15 revenue. Thus, the new production line of plastic cup products is expected to boost its performance in FY16 onwards if it is able to penetrate the market. Beneficiary of stronger USD & SGD Based on its FY14 annual report, every 5% appreciation in USD/SGD vs. MYR would translate into RM0.121m or RM0.439m increase respectively in its FY14 Net Profit (or +1.0% or +3.8% respectively). Beneficiary of low crude oil prices The recent plunge in crude oil prices has sent raw materials resin prices on a downward trend. A decline in resin prices will definitely have a big effect on downstream player, like SCGM as resin contributes circa 50% input costs. Hence, SCGM should record margin improvement in upcoming quarterly results. Industry outlook remains buoyant Malaysian plastics industry remains bright; especially export market, which will have a positive spillover effect on SCGM. Strong earnings track records and balance sheet SCGM has uninterrupted profit growth over last 5 years; relatively high ROE of 21.2%; net cash per share of 5.6 sen; and attractive dividend yield of 4.1%. SCGM has implemented a policy of paying dividends every quarter and adopted a dividend policy of no less than 40% of annual net profit effective Margin expansion from stronger USD & SGD; sustained runup in plastic packaging industry; and low raw materials prices. New expansion on plastic cups. Foreign currency exchange risks; Prices of raw mat; and Production or operational risks. HLIB Research PP 9484/12/2012 (031413) July 6, 2015 Not Rated Share Price: RM3.45 / Ex RM2.30 Nick Foo Mun Pang MPFoo@hlib.hongleong.com.my KLCI Share price RM SCGM (LHS) KLCI (RHS) Jul-14 Sep-14 Dec-14 Feb-15 Apr-15 Jul-15 Information Bloomberg Ticker SCGM MK Bursa Code 7247 Issued Share (m) 80 Market cap (RMm) mth avg volume ( 000) 241 SC Shariah-compliant Yes Price Performance 1M 3M 12M Absolute % Relative % Major shareholders (%) Lee Family 55.68% KWAP 5.10% Summary Earnings Table FYE April (RM m) 2012A 2013A 2014A 2015A Revenue EBITDA Net profit Basic EPS (sen) P/E (x) BV / share P/BV (x) ROA (% ) ROE (% ) DPS (sen) Div Yield (% ) Pts Valuation At current share price of RM3.45 per share, SCGM is trading at FY15 P/E of 17.6x, 2.8% discount to the plastic packaging average industry P/E of 18.1x. Assuming SCGM is able to achieve additional 7% to 8% revenue growth from the new plastic cup and able to maintain margin, P/E for FY16 would drop to 16.5x. Page 1 of 10 6 July 2015

2 Background SCGM Berhad (SCGM) was established in 1984 through its wholly-owned subsidiary, Lee Soon Seng Plastic Industry Sdn Bhd, and is Malaysia s one stop leading thermovacuum formed plastic packaging manufacturer as it provides end-to-end production from extrusion to packaging and delivery to its customers in Malaysian and overseas (Figure #2). It has a wide distribution network of 30 distributors and exports to 20 countries (Figure #3). In FY04/15, 46% of its products are exported overseas. SCGM has been serving more than 60 well -known brands (Figure #4) in its portfolio from various sectors including food (contributing 74% of its FY15 s total revenue); extrusion, medical & others (20%); and electronics (6%) (Figure #5). SCGM manufactures and sells thermos-vacuum formed plastic products to local market and exports to 20 countries. SCGM owns 6 extrusion machines with total capacity of 40 tonnes daily at utilization rate of 75% as at 4Q15. It has more than 5,000 moulds across various product categories. It owns Benxon, TempScan, and Kingtex brands; with about 52 mould designs registered under the Intellectual Property (IP) Office of Singapore and 62 mould designs registered under IP Corporation of Malaysia. Figure #1: SCGM s structure Figure #2: Manufacturing process Page 2 of 10 6 July 2015

3 Figure #3: Sales by geographical segments Figure #4: SCGM s Client Portfolio Figure #5: SCGM s product range Page 3 of 10 6 July 2015

4 Growth engines New expansion on plastic cups SCGM is currently emphasized on plastic cups which have great potential at Pasar Pagi/Malam markets (Pasar pagi/malam is a Malay and Indonesian word that literally means "morning/night market"). Plastic cup is part of our daily lives and has gradually become a necessary for Food & Beverage hawkers at Pasar Pagi/Malam. Given plenty of morning/night markets every day, there is huge potential plastic cup. Since March 2015, SCGM has commissioned its new plastic cup production line (Figure #6). It has invested RM11.6m for machinery and construction of new plant within existing premises. This new production line is capable of producing up to 1.3m cups per day or approximately 470m cups per year. SCGM is targeting F&B clients locally and overseas and expecting its revenue to grow by 7% to 8% yoy for FY16. Going forward, this new products has the potential of contributing. Thus, new production line of plastic cup products is expected to boost SCGM s performance in FY16 onwards if SCGM can successfully penetrate the market. Potential for plastic cup at Pasar Pagi/Malam markets is set to boost SCGM s revenue in FY16 by 7% to 8% yoy, potential of up to RM20m revenue per year. Figure #6: New plastic cup manufacturing line Beneficiary of strengthening USD and SGD SCGM is a net beneficiary of strengthening USD and SGD as 46% of its products are mostly sold in USD and SGD respectively while most of its cost is in MYR. Based on its FY14 annual report, it recorded a sizable unrealized foreign exchange gain of RM1.09m (6.8% of FY15 net profit) arising from various export sales which contributed to the rise in profits. Stronger USD and SGD will have positive impact on SCGM s profit margin. Every 5% appreciation in USD/SGD vs. MYR would translate into RM0.121m or RM0.439m increase respectively in its FY14 Net Profit (or +1.0% or +3.8% respectively). Having said that, any unfavourable fluctuations would also equally erode the group s profitability. Beneficiary of low crude oil prices SCGM is expected to benefit from lower input costs such as fuel and raw materials. Approximately 50% of its total input cost comes from resin prices, which have a positive correlation with crude oil prices. The recent plunge in crude oil prices has sent raw materials resin (HDPE, LLDPE and LDPE) prices on a downward trend. A decline in resin prices will definitely have a big effect on downstream player, like SCGM. Hence, SCGM should record margin improvement in upcoming quarterly results. SCGM will benefit from low resin prices due to lower crude oil prices. Page 4 of 10 6 July 2015

5 Industry outlook remains buoyant Malaysian plastics industry s prospect remains bright; especially export market which is gaining stronger momentum in recent months. According to Malaysian Plastics Manufacturers Association (MPMA), export numbers are becoming more captivating as we see a 11.5% rise in exports of Malaysian Plastics for CY14 vs. 6.4% in CY13 on the back of rising per capita consumption of resin. The industry s turnover has also been steadily increasing with a 3-year CAGR of 4.1% (Figure #7). Malaysian plastics industry is gaining momentum in export market thanks to resilient demand from F&B clients. SCGM is a downstream player. Demand is least affected by high raw materials costs or global uncertainties arising from economic slowdown as most of its clients are Food & Beverage companies, which tend to see more resilient demand in long term as plastics packaging is part of our daily lives in every way and is the largest segment of the plastics industry in Malaysia (accounted for 7.3% of 2014 total turnover of RM19bn) (Figure #7). In tandem with the bright plastics & packaging industry outlook, SCGM recorded higher revenue from overseas markets for its thermo-form plastic packaging. It registered 12.4% growth in export sales yoy from RM43.8m to RM49.2m in FY15 (Figure #8). We believe that SCGM s export sale is likely to see double digit growth over the next 2-3 years as it is aggressively looking to increase market share worldwide and participates in tradeshows worldwide to create greater awareness and attract more customers. Figure #7: Key data for the Malaysian Plastics Industry Source: MPMA, HLIB Figure #8: SCGM s export sales figures Page 5 of 10 6 July 2015

6 Potential Merger & Acquisition play There are no plastic & packaging companies with a dominant market share in local industry. We notice that numbers of plastics manufacturers are decreasing while demand for plastic products is gaining momentum (Figure #7). Scientex s acquisition of Great Wall Plastics Holdings Berhad in March 2012 and Can -One Bhd s stake in Kian Joo Can Factory Bhd could ignite more M&A interest in the industry with other players such as Daibochi Plastic, Thong Guan Industries and Tomypak Industries. We believe that SCGM could go on the M&A path to gain higher economies of scale and scalability. SCGM could potentially go on M&A path to gain higher economies of scales and scalability. Financials Financial performance SCGM has recorded consistent rise in revenue and earnings since FY11. The Group s revenue and net profit grew by CAGR of 12% and 35% respectively from FY11 to FY15A (Figure #9). Going forward, management is optimistic that the financial results and profit margins will strengthen further into FY16, underpinned by several positive factors including: 1. The sustained bullish plastics packaging sector outlook, as there is also an emerging trend whereby developed countries look to the Asean market for lower-cost quality producers to meet their flexible packaging needs; 2. Sales turnover improving as it continuously source for new customers from overseas and domestically to sustain its growth; 3. The new product line, namely plastic cups, which has commenced operation in June 2015 and is expected to boost sales for FY16; and 4. Lower prices of key raw material, which has stabilised in the current year and will contribute to stable input cost. Management is optimistic that SCGM s top and bottomline will strengthen further into the FY16 thanks to the sustained bullish plastic packaging sector outlook; turnover improving; new product line; and lower prices of key raw mat. Figure #9: SCGM s historical revenue and net profit performance Source: HLIB Strong balance sheet, with net cash of 5.5 sen and 4.1% dividend yield SCGM recorded higher returns on enhanced profitability as ROE improved to 21.2% compared to FY14 s ROE of 15.7%. Apart from its probability, its short-long term borrowings remain very low with total borrowings of less than RM2m. Although SCGM s net cash declined from RM15.7m in FYE14 to current net cash of RM4.5m mainly due to capex on new production line, it still has net cash per share of 5.6 sen. Historically, the company has annual free cash flow of circa RM5m -13m (or RM per share). Strong and sustainable balance sheet, with net cash per share of 5.6 sen and attractive dividend yield of 4.1%. Page 6 of 10 6 July 2015

7 SCGM has implemented a policy of paying dividends every quarter and a dividend policy of no less than 40% of annual net profit effective Coupled with positive free cashflow as well as potential double-digit earnings growth (if it is able to hit the targeted revenue from its new plastic cups), dividend could be on rising trend and become a potential re-rating catalyst for the Group. The Group has been paying dividend consistently since The total payout amount has been increasing since 2012 while dividend payout ratio rose to 72%. As for FY2015, it paid total dividend of 14 sen, translating into 4.1% dividend yield. Figure #10: SCGM s dividend per share and dividend payout ratio Source: HLIB Corporate Exercise Bonus issue On 25 June 2015, SCGM proposed a bonus issue on the basis of 1 bonus shares for every 2 existing ordinary shares held. The proposed bonus issue is expected to be completed by the third (3 rd ) quarter of calendar year We are slightly positive on the proposed announcement as it could create some excitement for share price performance in the near term and also would result in a larger share base capital, enhancing the liquidity and marketability of the shares. SCGM proposed bonus issue on the basis of 1 for 2 existing ordinary shares held. Risks Foreign currency exchange risks SCGM is exposed to foreign currency exchange risks on its sales and purchases that are denominated in USD as well as SGD. Fluctuations in USD or SGD will have an impact on the prices of imported raw materials as well as export earnings, which will in turn affect the profitability of the Group. Therefore, a sharp depreciation in USD or SGD will have a negative impact on the Group s margin. SCGM s major risks include foreign currency exchange risks; prices of raw mat; and production or operational risks. Prices of raw materials Raw material prices used in production such as resin may fluctuate rapidly owing to intervening factors such as crude oil prices. Any rise or decline in the crude oil prices may affect the prices of raw materials. Production or operational risks SCGM s revenue is dependent on production process running smoothly and efficiently. As such, certain events which are beyond control such as theft, energy or water supply crisis, flood, industrial accidents or breakdown of production machineries can cause significant loss. Page 7 of 10 6 July 2015

8 Valuation At current share price of RM3.45 per share, SCGM is trading at FY15 P/E of 17.6x, Valuation appears fairly 2.8% discount to the plastic packaging average industry P/E of 18.1x. Assuming SCGM value despite SCGM is is able to achieve additional 7% to 8% revenue growth from the new plastic cup and trading at FY15 P/E of able to maintain margin, P/E for FY16 would drop to 16.5x. 17.6x, which is 2.8% Figure #11 Peers Comparison discount to the average Market Cap Gross Price P/E (x) P/B (x) ROE (%) Company FYE (m) DY (%) industry P/E of 18.1x. (MYR) Malaysia SCGM Bhd Apr Scientex BHD Aug , Daibochi Plastic & Packaging Industry Bhd Dec SLP Resources Bhd Dec Thong Guan Industries Bhd Jan Average Source: Bloomberg, HLIB Page 8 of 10 6 July 2015

9 Income statement Cashflow FYE 30 April (RM m) 2012A 2013A 2014A 2015A FYE 30 April (RM m) 2012A 2013A 2014A 2015A Revenue EBIT Operating cost D&A EBITDA Working capital changes D&A Taxation (2) (3) (4) (4) Net Interest Others Associates Operating cashflow Jointly controlled entities Capex & acquisitions Exceptionals Free cashflow Pretax profit Others Taxation (2) (3) (4) (4) Investing cashflow Minority Interest Equity Raised PATAMI Others Core Earning Net Borrowing Basic shares (m) Financing cashflow Basic EPS (sen) Net cashflow (10) Balance sheet Valuation ratios FYE 30 April (RM m) 2012A 2013A 2014A 2015A Net DPS (sen) Fixed assets FCF/ share (sen) Other long-term assets FCF yield (% ) 2.2% 3.6% 4.8% 1.7% Other short-term assets Market capitalization (m) Working capital EBITDA Margin Receivables PBT Margin Payables PATMI Inventory Net cash / (debt) Growth margins ratios Cash Growth (%) ST debt Sales Growth LT debt Operating expenses Shareholders' funds EBITDA Growth Share capital PBT Growth Reserves PATMI Minorities Basic EPS Growth Other liabilities Summary Earnings Table Quarterly Financial Summary Revenue FYE 30 April (RM m) 1Q15 2Q15 3Q15 4Q15 EBITDA Revenue Net profit PBT P/E (x) Taxation BV / share Minority interests P/BV (x) Net Profit ROA (% ) ROE (% ) EPS (sen) Page 9 of 10 6 July 2015

10 Disclaimer The information contained in this report is based on data obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, is made as to the accuracy, adequacy, completeness or reliability of the info or opinions in the report. Accordingly, neither Hong Leong Investment Bank Berhad nor any of its related companies and associates nor person connected to it accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may arise from the use or reliance on the info or opinions in this publication. Any information, opinions or recommendations contained herein are subject to change at any time without prior notice. Hong Leong Investment Bank Berhad has no obligation to update its opinion or the information in this report. 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As of 6 July 2015, Hong Leong Investment Bank Berhad has proprietary interest in the following securities covered in this report: (a) As of 6 July 2015, the analyst, Nick Foo Mun Pang, who prepared this report, has interest in the following securities covered in this report: (a) -. Published & Printed by Hong Leong Investment Bank Berhad (10209-W) Level 23, Menara HLA No. 3, Jalan Kia Peng Kuala Lumpur Tel / Fax Equity rating definitions BUY Positiv e recommendation of stock under coverage. Expected absolute return of more than +10% ov er 12-months, with low risk of sustained downside. TRADING BUY Positiv e recommendation of stock not under coverage. Expected absolute return of more than +10% ov er 6-months. Situational or arbitrage trading opportunity. HOLD Neutral recommendation of stock under coverage. Expected absolute return betw een -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negativ e recommendation of stock not under coverage. Expected absolute return of less than -10% ov er 6-months. Situational or arbitrage trading opportunity. SELL Negativ e recommendation of stock under coverage. High risk of negative absolute return of more than -10% ov er 12-months. NOT RATED No research coverage, and report is intended purely for informational purposes. Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% ov er 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return betw een 5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% ov er 12-months. Page 10 of 10 6 July 2015