SCGM reported a 3QFY22 headline net profit decline of 22.5% YoY to RM6.2m, affected by the elevated raw material costs. After adjusting for non-core items, SCGM’s core net profit came in at RM6.2m. Cumulative 9MFY22 core net profit of RM22.2m were below ours and consensus estimates, accounting for 62.3% and 61.4% respectively. The discrepancy in our numbers was mainly due to the higher-than-expected raw material costs. In light of the ongoing global supply chain disruption and high oil prices, we cut our earnings forecast for FY22-24F by 6-21%. Following our earnings adjustment, our TP is lowered to RM2.32 (previously RM2.83), as we lower our PE multiple to 13x (close to its 3-years historical average) from 15x. We also roll forward our valuation base year to CY23. Given the limited upside potential, we downgrade our call on SCGM to Neutral.

• 3QFY22 revenue increased by 14.1% YoY to RM71.3m, given the growth in both local (+18.6% YoY) and export sales (+5.5% YoY). The stronger performance was mainly attributable to the higher deliveries of F&B packaging. On a QoQ basis, revenue declined by 1.7%, due to lower sales and distribution of face masks and extrusion.

• Cost pressure affecting margins. SCGM’s 3QFY22 core net profit fell by 20.8% YoY to RM6.2m as the group’s operating profit margin declined by 2.4ppt to 11.4%. This was mainly due to the spike in resin prices, additives, chemicals and packaging costs.

• Dividend. SCGM declared a third interim dividend of 1.4sen, bringing the total dividend declared YTD to 5.1sen, translating to a dividend yield of 2.3%.

• Outlook. While packaging demand is expected to be healthy following the revival of local hospitality and tourism industry, we remain wary on SCGM’s profit margins going forward. We are of the view that the gradual adjustment in ASP might not be sufficient to cushion the impact of a sudden spike in commodity prices. Note that resin prices have risen by c.18% YTD, due to the rising crude oil prices caused by global supply chain disruptions and uncertainties from the Ukraine-Russia conflict. Meanwhile, we continue to expect the demand for face masks to remain steady as the usage of face masks remains mandatory in our daily lives.

Source: PublicInvest Research - 30 Mar 2022