SCGM margins squeezed by rising competition, resin costs

KUALA LUMPUR: SCGM Bhd may not be recovering from its poor margins anytime soon given the intense price competition for lunch boxes and rising resin costs.

PublicInvest Research said its margins are likely to remain under pressure in the near term despite expectations of rising sales in the coming quarter.

The research house maintained a neutral call on the counter with an unchanged target price of RM1.39. It said valuations remain unattractive based on the current trading prices at earnings multiples of 20-25x.

It said Asia File has invested RM30mil in the production of paper and plastic disposable foodware in Simpang Ampat, Penang, under the brand name ABBAWARE. 

"The emergence of new players would make the lunch boxes even more price competitive, further weakening margins that are already paltry. Currently, lunch box sales account for 13% of the F&B segment, which also makes up about 10% of group sales. 

"To counter the stiff competition, the group has recently launched a cheaper lunch box version, called 'Ecoplus'."

Meanwhile, resin cost makes up 50% to 65% of SCGM's operating cost. Resin cost has jumped over the last one year due to the rising crude oil prices as well as growing demand from China.

"For 1QFY19, resin cost rose 14% YoY while other costs such as labour, electricity expense, finance and depreciation also inched up during the migration period. 

"To ease this resin cost issue, the company has sourced for recycled resin in the local market. While it requires further processing such as crushing and cleaning, it is 30% cheaper as compared to new resin however."