SCGM Bhd (“SCGM”) was incorporated in Malaysia on 29 June 2007 as an investment
holding company with its subsidiary, Lee Soon Seng Plastic Industries Sdn Bhd
(“LSSPI”) principally involved in manufacturing and trading of plastic
products. In a span of 34 years, the Group has grown to become a leading
thermoform food and beverage (“F&B”) packaging manufacturer in Malaysia.
As at 25 October 2019, the Group has a market capitalisation
of approximately RM249.74 million. In this article, we will take a closer look
at the business, management and financial aspects of the Group, to gauge its
suitability as an investment.
SCGM provides one-stop plastic packaging
solutions to customers in Malaysia and overseas across wide-ranging sectors,
including F&B, electronics and medical industries. The table below shows
the geographical and customer segmentations of the business over FY2015 to FY2019.
Source: 2019 annual report
Broadly, SCGM produces 2 different products:
extrusion sheets/ thermoplastics and thermo-vacuum formed plastic packaging.
Extrusion sheets are semi-raw materials that can be sold or used as a raw
material for thermo-vacuum products. Sales of extrusion sheets accounted for
13.3% of the Group’s total sales for financial year (“FY”) 2019.
On the other hand, thermo-vacuum formed plastics are plastic products that go through the process of heating extrusion sheets as well as forcing it over a mold surface with the help of vacuum. The thermo-vacuum products are typically for use in packing F&B (sandwiches, cakes, biscuits, salads, fruits, etc.) and electronic products (liquid crystal display, hard disk drive parts, etc.). Sales of thermo-vacuum plastic products to F&B and electronic customers accounted for 80.6% and 6.1% of the Group’s total sales for FY2019 respectively. Picture samples of SCGM’s thermos-vacuum products are shown below.
In the last quarter of FY2019, the Group
completed the transfer of machinery from the previous Kulai plant to the new
factory. Situated on a15-acre land with a built-up area of 600,000 square feet,
the RM121 million new plant is significantly larger than the previous premises.
The larger space afforded SCGM increased floor space to house additional
machinery, as well as streamline processes to maximize efficiency. With the new
Kulai plant and its Klang Valley manufacturing facility, SCGM’s extrusion
capacity rose from 41.0 million kg per year to 67.6 million kg per year.
We share below our views on the strength and
weaknesses of the Group’s business model: –
SCGM operates in an industry where competitors are abundant. The commoditized nature of their products also means that customers are price sensitive. To maintain cost leadership, SCGM has had to invest in advanced extrusion and thermoforming machinery technologies, which require significant capital outlay. However, an advantage of high-speed automated machinery is that it requires less manpower and helps the Group to counter workers wage inflation.
The raw material of SCGM’s products are petroleum based derivatives such as Polyethylene (PE), Polypropylene (PP), Polyvinyl Chloride (PVC) and Polycarbonate (PC). Consequently, the costs of raw materials move in tandem with fluctuations in crude oil prices. A spike in crude oil prices (and in turn raw material costs) will affect the Group’s bottom line unless it is able to pass on cost escalations to its customers.
To be fair, factors such
as oil and resin prices are not within management’s control. In such
circumstances, we seek an experienced management team to navigate the challenging
Historically, the Group’s growth in sales has come from the F&B segment, where there is increasing consumer demand for more environmentally friendly products. Heading the call for sustainable food packing, SCGM has introduced a line of eco-friendly products in an effort to reduce its carbon footprint. Developed in collaboration with Sugianto Tandio (the founder and world-renowned innovator of eco-tech plastic solutions), SCGM’s “Benxon” – brand degradable plastic packaging obtained SIRIM certification (Malaysia Regulator) for the usage of the Eco-Label mark from June 2017 onwards. This demonstrates management’s adaptability to changing industry trends.
Dato’ Sri Lee Hock Seng (68, Malaysian)
as Executive Chairman / Managing Director on 19 December 2007. Re-designated
as Executive Chairman on 9 December 2015. One of
the founders of LSSPI and has been the Managing Director of LSSPI since its
incorporation on 4 May 1984. Responsible
for the strategic business development and future directions of the Group.
Frequently travels abroad to keep abreast with the latest developments in the
packaging industry and to explore new market prospects for the Group.
Dato’ Sri Lee Hock Chai (57, Malaysian)
as Executive Director of SCGM on 19 December 2007. He is also Executive
Director of LSSPI since 4 May 1984. One of
the founders of LSSPI. He was promoted as the Managing Director of SCGM on 9
December 2015. He is presently responsible to implement and execute the
strategic business development plan of the Group. He has more than 34 years
of experience in the field of research and development.
Dato’ Sri Lee Hock Guan (58, Malaysian)
as Executive Director on 19 December 2007 and was re-designated as Deputy
Managing Director on 15 March 2017. He has been an Executive Director of
LSSPI since 4 May 1984.He
presently assists the Managing Director in areas which include overall material
requirement planning, manpower, product capacity, general machinery
maintenance and overall safety in production activities.
Mr Lee Hock Meng (65, Malaysian)
as Executive Director on 19 December 2007.Joined
LSSPI in 1990 as a Logistics Manager. He is presently responsible for overall
shipping and logistics management for the Group.
(Source: 2019 annual report)
As investors, we prefer businesses that are
founder owned and managed. Since the directors of SCGM are also substantial
shareholders, we trust that they would be motivated to ensure the continued success
of the Group.
(Source: 2019 annual report)
While sales have doubled from RM106.63 million
to RM219.57 million over the past 5 years, profits have unfortunately not grown
in tandem. In fact, the Group has recorded its first ever annual loss of RM5.12
million in FY2019 since listing. Management has attributed the loss in FY2019
to i) higher resin prices (due to higher crude oil prices), ii) increases in depreciation
and finance costs and iii) a significant jump in tax cost due to deferred tax
liabilities recognized on the new machinery and new Kulai plant.
At the same time, the Group’s financial position has deteriorated from a net cash position of RM2.13 million in FY2015 to a net debt position of RM107.68 million in FY2019. Nevertheless, SCGM has continued to a declared generous dividend in FY2019, well above the dividend policy of 40% of profits. With the gearing level at an all-time high of 0.69x, the Group could consider reducing its dividend payout temporarily to pare down its debts.
(Source: Google Finance)
The Group’s share price has since seen a sharp sell-off
following the recent poor performance. This is in spite of management’s efforts
to provide some share price support through a series of insider and company
As investors, we should not be swayed by the
action of insiders, instead we should think for ourselves if there are any
merits for an investment. At a market valuation of RM249.74m, the stock is
currently trading at 15.23x FY2018 profits after tax, indicating that the stock
is more than fairly valued.
Therefore, any further upside in share price
would depend on whether the Group is able to turnaround its business. I would track
the quarterly results of the Group to look for signs of improved performance. I
would also look at securing answers to following questions: –
What is the outlook for resin prices and how great of an impact would it have on profit margins?
What are the Group’s plans to improve plant utilization and control costs?
What are Group’s strategies to secure more customers in both local and overseas markets given the large plant capacity?
Does the Group have any plans to dispose its old Kulai plant since the migration process to the new plant is completed?
Does the Group have plans to pare down its borrowings?
Notwithstanding the above comments, my view is
that SCGM does not have the attributes of a high-quality business. The business
does not seem to have a competitive advantage or “economic moat” and operates
in a highly competitive industry. At this juncture, I will set it aside for now
as a potential investment.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.