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apple developer:Moderating resin prices good for food packaging player

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,Streamlining ops: A worker attending to the production machine at SCGM’s plant in Johor. It is shifting to higher value-added products to help mitigate margin pressure.

PETALING JAYA: The easing of resin prices in the coming months bodes well for SCGM Bhd, which has had to combat rising cost pressure in recent months to protect its margins.

The food packaging producer had adjusted its average selling prices (ASPs) by around seven times since last November, as rising oil prices and tight supplies pushed resin prices to a decade high.

SCGM noted that while resin prices are expected to moderate in the coming months, they are unlikely to revisit the low levels of last year. The group is currently streamlining its operations by shifting to higher value-added products to help mitigate margin pressure.

While the group can adjust ASPs in tandem with rising resin prices, Public Investment Research noted the lagged effect, adding it could take up to two quarters to reflect normalised margins.

“It is worth noting that it is easier to raise selling prices for standardised products compared to customised products as the latter is more competitive, ” the brokerage said. It has maintained its “outperform” call on SCGM, with an unchanged target price of RM2.62.

Public Investment Research noted that SCGM at a post-result briefing said it had introduced a new tray product called “USA Modal”, which would mainly cater to the US market, and it was in the midst of securing various approvals.

On the allocated capital expenditure (capex) of RM20mil for the financial year ending April 30,2022 (FY22), the management plans to increase its annual extrusion capacity by six metre kilogramme (m kg) to 73.6m kg.

For the nine months to January 2021, its net profit grew nearly three-fold to RM26mil from RM10.4mil in the corresponding period a year ago on a favourable sales mix, lower raw material costs and reduced operating and interest expenses.

During the period in review, the group registered RM180.8mil revenue, up 12.4% from RM160.8mil previously, thanks to higher deliveries of food and beverage packaging and contributions from the new personal protective equipment segment comprising face masks and face shields.

Kenanga Research has cut its target price for SCGM to RM2.62 from RM3.85 previously after rolling forward its valuation to FY22 earnings using a 15 times multiple. It has maintained its “outperform” call on SCGM.

“We believe that SCGM is able to pass on higher costs as management has indicated that despite raising ASPs, there is little resistance with no decrease in orders from customers, ” Kenanga Research said.

“We believe that management will continue to focus on producing high-margin (mid/high-teen) customised food and beverage products by improving the utilisation rate over increasing capex in FY22, ” it added. Kenanga Research expects resign prices for SCGM to average at US$1,000 (RM4,145) per tonne for FY21, and US$1,200 per tonne for FY22.

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