SCGM Berhad (AR 2018)

Corporate Profile

• 34 years in business and listed on bursa malaysian in 2008
• Plastic solution for F&B, electronic and medical industry
• Obtain eco label mark from SIRIM for "Benxon" brand
• Currently has 2 manufacturing plant - Kulai (Johor -  Grow its 170,000 sqft facilities in 2009 to 600,000 sqft in 2017) & Banting (Selangor - setup in 2017 with 47,000 sqft and capacity of 5 million KG)
• Exclusive provider of decompose-able lunch box & food trays for 29th SEA games and 9th Asean Para games (good for their brand awareness and exposure)

Financial Highlight

• Revenue doubled from 2014 - 2018 (main reasons being growth in Malaysia market where sales increase from 70 million in year 2016 to 136 million in year 2018)
• Interest expenses and gearing remain at a healthy level (Gearing in year 2018 being 0.45)
• Main reasons for EPS to drop significantly from 2016 is due to increase in number of shares
  
• F&B remain as their major segment which contribute 80% of their revenue. 
• Generous with its dividend payout with about 70% of its profit are used to pay dividend (minimum 40% dividend payout policy)
• Cash reduced significantly due to the construction of its Kulai manufacturing plant.
• Depreciation expenses increased by 3 fold from 4.7 million in year 2014 to 11.2 million in year 2018 (due to its new Kulai factory)

Operation Highlights

• The thermo-form industry in Malaysia continued its uptrend during the year, with the ban on polystyrene packaging implemented in Klang Valley and Johor. 
• New government’s support in banning the use of polystyrene packaging nationwide, which could become a catalyst for the Group to enter next high growth phase.
• The Group also doubled our efforts in expanding our customers base, both locally and regionally. These initiatives translated into the Group gaining 138 new local customers and 13 new foreign customers during in year 2018, comprising vendors, manufacturers and retailers. We also penetrated the African market for the first time by securing a distributor for our products in Nigeria. (Obviously this is due to the ban of polystyrene where most local user will switch to SCGM for their eco friendly product)

Financial Review

• Increasing crude oil prices during the year inevitably led to higher prices of resin, which is a key raw material in our products.
• The construction of the new Kulai manufacturing plant and acquisition of machinery necessitated higher borrowings, and led to the corresponding surge in finance costs in FY2018 to RM1.6 million from RM0.7 million a year ago. Hence, the Group’s strong sales was tempered by all these factors, leading pre-tax profit to drop 28.1% to RM19.1 million, compared to RM26.6 million in the previous year. Net profit also followed in tandem, declining 28.7% to RM16.4 million in FY2018, versus RM23.0 million previously

Challenges

• Increase in global crude oil price
• Labour shortage and higher labour cost

Growth Prospect

• The new Kulai plant will contain technologically advanced machinery, which will reduce our reliance on labour and increase production capacity. 
• Together with machinery which will be relocated from the existing factory, the Group’s total extrusion capacity will expand to 67.6 million kg per year from 41.0 million kg per year currently, inclusive of the facility in Klang Valley.
• Aim to be a leading thermo-form plastic packaging providers in the region.  

As at 2nd quarter of 2019

• Revenue were historical new high in 2Q2019 (RM57million) however margin remain low and there is no sign of recovery (2.3% in year 2019 vs 10.3% in year 2018)
• Gearing ratio remain remain high at 0.62 (increase from 0.45 in year 2018) 
• Interest expense for 1Q2019 is RM1.2 million, 2Q2019 is RM1.38 million. (This is a huge concern as finance cost constitute 90% of its net profit)

• Depreciation remain high at 7 million for 2 quarters as compared to 11 million in year 2018. 

• Export sales slow down in in 2019 as compared to 2018. However the drop was offset by the gain in local sales. 

• The lower Profit before Tax was due to higher resin prices, higher finance costs, higher utilities expense, higher depreciation charges and higher labour cost incurred during the current quarter.
• The transition of the Group’s main operations from the old premises to the new headquarters is currently midway, and is targeted to operate fully from the new base in the third quarter ending 31 January 2019.The Group will strive to achieve better financial performance in the coming financial quarters when the new Kulai plant is commissioned.

Strength

• Impairment on trade receivable remains low which is less than 1%. (meaning their clients are mainly 好脚)
• 80% of their product are for F&B such as vegetables, fruits and confectionery (these products are actually defensive in nature)
• Plans to dispose the old Kulai plant for RM70 million to pair down their debts (theirs bank borrowing up to date was RM110 million, if the above plan is being materialized, gearing will reduce from 0.62 to 0.19 and this will greatly reduce its interest expense)
• The new automated plant at Kulai utilization rate is currently 50%, with the increased automation as well as larger power supplies, there will be lots of room to achieve greater economies of scale and margin improvements going forward.
• The new Kualai Plant actually double up its production capacity from 36 million KG/annum to 61 million KG/annum. 
• The new Kulai plant actually build on the concept of industry 4.0 which is fully automated, from raw material -> thermoforming -> packaging through the conveyor belt. A large scale production basically only requires one person to operates. (展望未来，李福成说，对餐盒包装的市场需求甚大，因此将生产迁移至新工厂，新工厂的面积约19英亩，面积比旧工厂多出1倍左右，不过，员工仍维持500人，无需增加人手。)
• It also complies with green building index so basically there is no need to turn on lights during the day (utilities saving). 
• Reinvestment allowances, which can offset up to 70% of taxable income and has not yet kicked-in despite the commencement of operations at its new plant as current earnings are still not favourable (not too sure how long is this reinvestment allowance).
• SCGM product are in line with SIRIM environment requirement which is decompose-able in 21 days. 
• Regardless of tight cash flow, Dato Lee Hock Seng (Chairman cum founder) mention that dividend payout ratio will maintain at least 40% of its profit and would strive to do better. 
• Ability to customize the plastic box according to clients' requirements. 
• Ability to mitigate the cost increment to their clients. 

Weakness

• Resin cost constitute 70% of its operating cost. 
• Margin remain compressed due to high depreciation, high finance cost, high raw material cost. 
• Price war between peers on the lunch box. 
• Can the company deliver what it mentioned above? In term of new factory utilization rate as well as maintaining the labour cost when production double. 

Valuation @ 1.14

• Dividend yield remain low (assuming the company is giving out 0.5sen every quarter, that is 2 sen per year, at 1.14, the yield is only 1.7%)
• Highest PE in the industry (current PE is 26). Bpplas (PE9.8), Tguan (PE7.6), Scientx (PE15.9)
• SCGM managed to deliver higher than peers gross profit margin (> 20%) and net profit margin (>10%). Industry net profit margin are usually below 10%

• After all the automation and increment in production capability, will SCGM gross profit and net profit margin shine again? 

Technical Analysis

SCGM are still forming lower low after the share price plunge in 2017, however the room for new low are shrinking. At 1.14, the price is still below its 20MA and there is no sign of recovery be it fundamentally or technically.