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Tuesday, December 18, 2012

SCGM- a reasonably attractive packaging stock

Background

SCGM Berhad is involved in manufacturing and trading plastic products, such as thermo-vacuum formed plastic packaging products and extrusion sheets that are used in the production of thermo-vacuum formed plastic packaging.

Recent Financial Results

For QE31/10/2012, SCGM's net profit rose 5% q-o-q or 68% y-o-y to RM2.3 million while revenue was mixed- down 10% q-o-q but rose 22% y-o-y to RM22.9 million. The explaination given by the company for the financial performance are:

Year-on-year performance

The sales performance was commendable as it is an improvement over previous year’s performance despite a challenging external environment. Aggressive marketing for new customers helped. The Hari Raya and Deepavali festivals falling in August and November respectively also boosted sales. The Profit before Tax was also very commendable compared to previous year’s performance as the input costs such as oil, power and raw materials continue to be quite stable in the current quarter. There was also better economies of scale which reduces the overall unit cost.

Quarter-on-quarter performance  

This quarter sales performance was less commendable but was not unexpected as the Hari Raya festival tend to be bigger festival than the Deepavali festival. Input cost such as labour, fuel and electricity which impacts on margins was stable in the current quarter of the financial year compared to the preceding quarter as world commodity prices remained stable. Economies of scale which reduces the overall unit cost also helped.

I always like a company that makes live easy for analyst.

 
Table: SCGM's last 8 quarterly results

 
Chart 1: SCGM's last 32 quarterly results

Financial Position

SCGM's financial position as at 31/10/2012 is deemed healthy, with current ratio at 4.3 times and gearing ratio at 0.06 time. Its working capital management is satisfactory, with inventory turnover & debtors' turnover of 63 & 96 days, respectively.

Private Placement Proposed

In March 2012, SCGM proposed a private placement of RM8.4 million for the following purposes:
  • Purchase of additional lines of production lines for thermo-vacuum forming process of RM2.3M
  • Acquisition of extrusion machines of RM2.0M
  • Repayment of bank borrowing of RM2.2M
  • Working Capital requirement of RM1.75M
  • Defraying expenses related to the private placement of RM0.15M
In view of its under-leverage position, SCGM can easily borrow to finance its fixed assets acquisition and working capital requirement. A case can be made that borrowing may be more cost-effective than equity financing. 

Valuation

SCGM (closed at RM0.50 yesterday) is now trading at a PE of 5.3 times (based on last 4 quarters' EPS of 9.48 sen). At this PE, SCGM is deemed reasonably valued.

Technical Outlook

SCGM has range-bound between RM0.43 & RM0.60 for 4 years, from 2008 to 2011. In early 2012, it broke the RM0.60 resistance to hit a high of RM0.80. In late November, the stock dropped back to its trading range for unexplained reason. SCGM is now resting at the horizontal line at RM0.50.

 
Chart 2: SCGM's weekly chart as at Dec 18, 2012_12pm (Source: quickcharts)

Conclusion

Based on good financial performance & position, reasonable valuation & trading at strong technical support, SCGM could be a good stock for long-term investment. One area of concern remained & that's the unexplained drop in the share price recently.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, SCGM.

4 comments:

hng said...

Hi Alex

Can you comment on CCM, its share price bashed down to all year low.

Ivan said...

Dear Alex,

It seem you are an analyst before switch to be a business man- remisier. Am I right?

Alex Lu said...

Hi hng

CCM is an interesting stock that warrants further investigation. It has dropped significantly on a small decline in top-line and bottom-line. To me, the decline looks excessive.

Financial position as at 30/9/2012 is mixed: Current ratio is adequate at 1.34 times while gearing ratio is high at 0.97 time. Debtors collection period stood at 85 days while inventory holding period stood at 178 days.

It needs to improvement its working capital management and possibly to raise its equity to a more comfortable level.

Notwithstanding the high leverage, the decline in CCM share price looks overdone.

Alex Lu said...

Hi Ivan,

I was not an analyst but a loan officer. When you lend out money, you need to know whether the borrower can pay back. The work is similar and yet different from an analyst's job.