The share price of SCG Packaging Public Company Limited (SET: SCGP) has been on a losing trend as of late, pressured by rising costs that investors expected to hinder its earnings, especially in 1Q22.
SCGP has lost 14.44% this year of its share price and 3.27% in the past month. However, the movement in the last five trading days showed signs of positivity with a gain of 5.80%.
Surging cost of old corrugated containers (OCC) has been one of the major problems for SCGP since 2021 along with rising coal prices. In FY2021, SCGP’s cost of sales was at 101,345 million baht (+38% YoY). In Q4 2021, cost of sales closed at 29,976 million baht, increasing by +57% YoY and +13% QoQ as a result of the consolidation of new M&P companies, heightened freight cost and energy cost, and harder access to recycled paper during the height of the COVID-19 pandemic in many countries which impacted raw material prices.
FSS International Investment Advisory (FSSIA) wrote in an analysis, believing that the cost of OCC will be lower this year, compared to 2021, especially its peak in October 2021, which should be able to offset the rise in energy price.
In the analysis, FSSIA stated that it believes SCGP’s net profit growth in 2022-24 will remain resilient and project net profit growth of 26% YoY in 2022, despite the higher cost of OCC and coal, which are expected to cap its EBITDA margin in 2022. The key drivers are the YoY weaker OCC price due to higher supplies and a limited impact from the coal price spike as coal accounts for only 5% of SCGP’s total costs.
The advisory firm believed the softening OCC cost should more than offset the rising energy cost, resulting in an improving EBITDA margin in 2022. Since the Oct-21 peak, the price of AOCC has declined by 10-15% due to the rising supply despite continued strong demand and high freight costs. FSSIA stated that it thinks the impact of the coal price hike will be limited and erode its EBITDA margin by 1-3% pts, given: 1) SCGP has locked in the price for 30% of its coal consumption volume of 2mt in 2022 at USD140/t since 2H21, based on FSSIA’s estimate; and 2) the remaining 70% coal consumption volume will be price linked mostly to the ICI4 coal price index, which is believed to see less of a rise than the Newcastle coal price index.
In addition, FSSIA maintained its BUY rating on SCGP, but trim the target price from THB77, based on 17.5x 2022E EV/EBITDA, to THB70 (+18% upside), now based on 16.1x 2022E EV/EBITDA, to reflect the weaker earnings outlook due to high energy costs, the high price of OCC, and the lower EPS forecasts for 2022-24 by 4.6-5.5%.
