This article first appeared in The Edge Malaysia Weekly, on November 30 - December 6, 2015.

A better profit margin, due to a stronger US dollar and savings from lower raw material costs, has given SCGM Bhd’s earnings and share price a much-welcomed boost.

The low crude oil prices and firm greenback are a bonus for the company, says executive chairman and managing director Datuk Seri Lee Hock Seng.

“We hope the current climate stays but then again, we are not too sure. However, even without these plus factors [weaker ringgit and lower input cost], our company will continue to do well in terms of earnings,” he tells 

The Edge in a phone interview.

Lee’s confidence stems from the uninterrupted earnings growth achieved by the Johor-based manufacturer of thermo-vacuum formed plastic packaging over the past five years. As he puts it, this consistency was not fuelled by favourable exchange rates or low input costs. Note that oil prices were above US$100 per barrel between 2012 and mid-2014.

SCGM’s net profit grew steadily from RM5.6 million in its financial year ended April 30, 2012 (FY2012) to RM15.5 million in FY2015 while net margins widened from 6.8% to 14.5%.

On the back of higher revenue, net profit jumped 38% to RM4.88 million in the first quarter ended July 31 (1QFY2016), up from RM3.54 million a year ago. The impressive financial performance was attributed to lower input costs and foreign exchange (forex) gains on the company’s exports.

Not surprisingly, SCGM’s share price skyrocketed 120% year to date and closed at RM2.90 last Thursday, giving the company a market capitalisation of RM348 million.

Lee says the group is conservatively targeting 10% revenue growth in FY2016. “It shouldn’t be a problem and we will be quite comfortable with such a growth rate. If you annualised our 1QFY2016 results, the growth could be higher [than 10%]. But bear in mind that when our volume is considered sizeable, a 10% growth is fairly good.”

On an annualised basis, SCGM could achieve a net profit of RM19.6 million on revenue of RM118.4 million in FY2016. This translates into a 26% and 11% year-on-year growth in net profit and revenue respectively.

Lee, 65, has been responsible for the group’s strategic business development since 2007. His younger brothers — Datuk Seri Lee Hock Chai, Datuk Seri Lee Hock Guan and Lee Hock Meng — sit on the board as executive directors.

The four brothers collectively own a 52.9% controlling stake in SCGM while Kumpulan Wang Persaraan (Diperbadankan) is also a substantial shareholder with 7.54% equity interest.

SCGM’s (fundamental: 2.60; valuation: 1.70) thermo-vacuum formed plastic packaging products are primarily for the food sector. It markets them locally and to 20 other countries.

Lee acknowledges the good effects of the current forex rates as the appreciation of the US dollar against the ringgit helped the company improve its net margin to 16.5% in 1QFY2016. “Moving forward, we are optimistic that the stronger greenback will have a positive impact on our full-year performance in FY2016. Forex gains are expected to give us an additional profit of 5% to 10%.”

For illustration purposes, Lee says if SCGM was to make a net profit of RM10 million, forex gains would make it RM10.5 million to RM11 million.

The current low oil price environment is another blessing for plastic-related product manufacturers like SCGM, which purchase raw materials, mainly resin, from the local market. Generally, falling global oil prices result in lower resin prices, thus reducing the cost pressure on these companies.

However, says Lee, despite the current weak ringgit and lower resin prices, SCGM is unlikely to give its customers any discounts, even if they try to negotiate lower prices. In other words, the company will make the most of the present business environment.

“Whenever they (our clients) ask for a discount on prices when the forex trend or raw material prices are favourable to us, we negotiate a win-win situation. Having said that, our pricing is quite competitive,” says Lee.

SCGM currently focuses on the food and beverage (F&B) sector, which accounted for about 75% of its revenue in FY2015. Lee says the company will continue to serve the food sector, for example the packaging for fruit, vegetable, meat and poultry products.

Its new production line is capable of producing up to 1.3 million cups per day, which is about 470 million cups a year.

“Thus far, we have received encouraging orders from F&B clients at home and abroad, mainly Pakistan, India, Australia and New Zealand. The current proportion is about 60% local and 40% exports,” says Lee.

Currently, the utilisation rate of the plastic cup production line is 50%, although it is expected to achieve full capacity between February and April next year (4QFY2016).

“One thing is for sure, we need more capital expenditure (capex) to achieve higher growth,” says Lee.

SCGM is undertaking a private placement, which is expected to raise more than RM30 million, of which 60% will be allocated for capacity expansion while the remaining 40% is for working capital. The placement shares were priced at RM2.61, which represents a discount of 7% to the market price.

Overall, says Lee, all production lines are running at a utilisation rate of 78% now, which leaves ample room for SCGM to receive more orders from clients.

With the planned capex and capacity expansion, SCGM’s total production capacity is expected to increase from 1.48 million kilogrammes per month to 1.98 million kilogrammes per month.

It is worth noting that SCGM’s plant is located on a nine-acre parcel in Johor Baru. The company is planning to buy the three acres adjacent to the plant for capacity expansion.

“We are still in the negotiation stage. Nothing has materialised so far in this area but on land purchase alone, we plan to spend RM3 million to RM4 million from internally generated funds,” says Lee.

SCGM was featured as Insider Asia’s stock of the day on Nov 19. The Edge Research says among the listed packaging players, it likes SCGM for its defensive earnings with growth potential.

The company has implemented a policy of paying quarterly dividends and at least 40% of annual net profit from this year.

In a non-rated Aug 25 report, Kenanga Research says the 40% dividend policy will only get better as the Lee family holds more than a 50% stake in the company, which aligns owners’ interest with shareholders.

“Moving forward, we believe management will continue to exceed expectations in terms of dividend payout, which would be potentially rewarding for shareholders,” says the research house.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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