SCGM: Risk And Reward Are Two Sides Of The Same Coin

SCGM had risen from about RM0.40 to RM2.60 since our BUY call in December 2012. Is there more upside to this stock after the 1-for-2 bonus issue in August? Let's re-examine the stock!

Results Update

SCGM's latest results for QE31/7/2015 was announced on August 19. In that quarter, SCGM's net profit dropped 5% q-o-q but rose 38% y-o-y to RM4.9 million while revenue rose 15% q-o-q and 9% y-o-y to RM30 million. Revenue increased q-o-q due to the introduction of a new product line, i.e. plastic cups and higher sales during Hari Raya in July 2015.

Despite foreign exchange gains as a result of a stronger U.S. dollar and slight improvement in profit margin as a result of stable fuel cost, SCGM's bottom-line dropped q-o-q due to a sharp drop in Other Operating Income from RM1.45 million to RM267k. No detail was given as to the reason for the drop in Other Operating Income. See Diagram 1 below.

 
Table: SCGM's last 8 quarterly results

 
Chart 1: SCGM's last 25 quarterly results


 Diagram: SCGM's quarterly results for QE31/7/2015, 30///42015 & 31///7/2014

Valuation

SCGM (closed at RM2.68 yesterday) is now trading at a PE of 20.6 times (based on last 4 quarters' EPS of 3 sen). At this PER, SCGM is fully valued. However, if you viewed SCGM as a growth stock with earnings CAGR averaging 40% in the past 2 years, its PEG ratio at 0.5x is quite reasonable. Like Daibochi & Tomypak, I always have difficulty accepting packaging companies as growth stocks because their revenue numbers are fair stagnant. Their earnings growth seems to come from better efficiency or lower operating cost (flowing more from lower input costs). Without growing your business, there is a limit to which one can squeeze out profit through efficiency improvement or from favorable input price movement. In view of that, I feel that SCGM is probably fairly valued but may gain further upside due to current low input price & favorable forex environment.

Technical Outlook

SCGM is in a long-term uptrend line. The 10-month SMA line, currently at RM2.50, has supported the stock fairly well. Recently, the stock broke above the horizontal resistance of RM2.60, accompanied by the bullish signal of MACD Signal line crossing above the MACD line. This bullish breakout could send the price higher- possibly testing the psychological RM3.00 mark.

However, unlike past breakouts, the current breakout is without huge volume. In fact, the price run-up in the past 10 months was not accompanied by significant volume. To me, the lack of volume can be viewed in two ways: positively as it means small number of sellers & less impediment as the share price marches higher AND also negatively because a change in perception can suddenly bring out large number of sellers that could easily overwhelm the reluctant buyers at high prices. Thus, it is important to watch this stock closely. In fact, the recent breakout level at RM2.60 should serve as an important support that must not be violated.


Chart 2: SCGM's monthly chart as at Oct 26, 2015 (Source: ShareInvestor.com)

Conclusion

Based on good financial performance, "reasonable" valuation & positive technical outlook, SCGM is still a good stock for long-term investment. For technical reason noted above, we must track this stock closely and be ready to reduce position if the share prices were to reverse below the recent breakout level of RM2.60.

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.