KUALA LUMPUR: Amid a challenging local and global economic landscape, thermos-vacuum form plastic packaging manufacturer SCGM Bhd sees itself as a defensive business as demand for its products stay resilient.

“Demand [for plastic packaging] is still very high,” according to the group’s executive chairman Datuk Seri Lee Hock Seng.

In fact, SCGM has decided to temporarily rent a factory to increase production to 36 million kg per year before its second factory is completed by December 2018.

The new factory is expected to boost capacity to 62.6 million kg per year.

Currently, SCGM’s production capacity is 25 million kg per year.

“Demand for our product is inelastic; people need it when times are good. Even when the economy is bad, people ‘dabao’ (Cantonese colloquial for takeaway food) more, which requires packaging,” he told The Edge Financial Daily in a recent interview.

SCGM makes plastic packaging for the food and beverage sector which contributes up to 75% of its revenue. Its products for the electronic and medical sectors make up 10% and 15% of revenue respectively.

So far, Lee said, about 40% of the group’s production is meant for export, while the remaining 60% is for the domestic market.

“It was a 50:50 ratio before this, but the export market grew in [a] single-digit percentage, while the domestic market has been enjoying double-digit growth lately, thanks to [the] rising trend of biodegradable products,” he said.

For the second quarter ended Oct 31, 2016 (2QFY17), Lee said SCGM added six new international customers and 34 new local customers.

It is worth noting that by June next year, five states in Peninsular Malaysia will be banning the use of polystyrene containers and plastic bags. The five are Penang, Melaka, Johor, Selangor and Perak.

In Kuala Lumpur, it was reported that by year end, Bukit Bintang will be the second area to be declared polystyrene-free as Kuala Lumpur City Hall pursues its green city initiative.

Dataran Merdeka was declared a prohibited area for polystyrene food containers in July last year.

SCGM’s Lee said the campaign to increase the usage of biodegradable products is very effective since it was initiated at the governmental level.

“Our clientele has been increasing after the ban on polystyrene packaging in some key states here, and locally, we are the biggest biodegradable packaging manufacturer,” he said.

For 2QFY17, SCGM registered RM2 million sales for biodegradable lunchboxes, a 42% growth from RM1.4 million in 1QFY17. Revenue for the quarter stood at RM42.02 million.

For the first half of FY17, the group recorded a net profit of RM10.94 million, a 13% growth from RM9.68 million last year, while revenue grew 25.31% to RM79.89 million, from RM63.76 million previously.

SCGM’s management has a policy to distribute 40% of its annual earnings as dividends to shareholders.

As at Aug 25 this year, Lee and his three younger brothers collectively owned a 48.26% stake in SCGM. SCGM are the initials of the brothers’ names.

Moving forward, Lee expects the group’s turnover will continue to reach a new record high in FY17 by registering double-digit growth.

“Our backlog [for orders] now stands at about two months, meaning if a customer orders now, it will take them two months before delivery. It is expected to go higher and we cannot afford to miss this market opportunity because we need this volume to feed our new factory by 2018,” he explained.

Therefore, Lee said SCGM’s management will consider renting additional factory space should the backlog reach 2.5 months.

However, it is not all rose petals and sunshine for SCGM. Effective tomorrow, the group will increase its selling prices to customers by 10% to offset the recent spike in resin cost, a raw material to produce plastic packaging products, which makes up more than half of total production cost.

“This is to sustain our margin and it is our first revision in two years. Usually, we prefer not to revise unless our overall costs increase by more than 10%,” Lee explained.

Currently, there are only three research houses covering SCGM, namely PublicInvest Research (outperform), Kenanga Research (outperform) and Inter-Pacific Securities Research (neutral). Their target prices for SCGM range from RM3.56 to RM4.

Last Friday, SCGM closed one sen or 0.3% higher at RM3.38, with a market capitalisation of RM446.16 million.

It was last traded at a forward price-earnings ratio of 20.74 times. Year to date, the counter has gained by 6.62%.