SCGP – Target EBITDA growth with high margin products

SCGP announced its overall business goal is for EBITDA to grow to Bt30-33bn by 2030, achieved via a focus on high growth, high margin downstream products. We expect earnings to grow in 3Q24 on better production volume after the long holidays plus higher pulp revenue after reopening from the maintenance shutdown in 2Q24. A drop in share price to -2SD of its PE limits downside risk. Outperform; TP is Bt40 based on 25.9X or -1SD of PE mean.

Targets EBITDA of Bt30-33bn by 2030. SCGP held a meeting to outline its goals for 2030. It plans to raise EBITDA by a 7.7% CAGR to Bt30-33bn by 2030 from Bt17.8bn in 2023 (Bt9.8bn in 1H24). Backing growth will be an emphasis on growing high-margin downstream products: fiber, polymer and foodservice packaging. It plans to maintain net debt/EBITDA in the 2.5-3.0X range, with ROE above 10% and a dividend payout ratio above 40%. Capex for 2025-30 is set at Bt80bn, mostly for growth: 34% for merger & partnerships (M&Ps) and 30% for organic growth, with maintenance taking 22%, cost savings 9% and ESG 5%.

Strategy to turn the Indonesia unit around. After consolidation, Fajar Paper’s short-term strategy is to export more of its paper packaging to Vietnam (currently exporting 2,000-3,000 tons), where upstream production is near capacity due to solid downstream demand. The price of paper packaging sent to Vietnam is about US$5/ton higher than that going to China. It is also negotiating 2-3 downstream M&P deals in Indonesia, expected to finalize in early 2025, to raise the integration level to 30% from 16% and improve production efficiency to reduce costs further. It expects to reach breakeven at the EBITDA level by the end of this year. Note that it bought 44.48% more shares in Fajar Paper for US$652.42mn or Bt23bn. Of this, Bt8bn came from internal cash flow and the rest was funded by a debenture and loans with an estimated average interest cost of 3%, implying additional interest expense of Bt450mn per year starting from September 2024.

2H24 earnings outlook. We expect earnings to recover in 2H24 due to higher production volume after the strong buying season in September-October that will boost overall packaging demand, plus higher demand brought by stronger economic activities and government stimulus in each country in which it operates, as well as a continued increase in ASP. Cost of raw materials such as wastepaper, as well as for coal, are expected to stabilize. The fibrous chain business is expected to improve QoQ after a two-week annual maintenance shutdown of its pulp & paper plant in 2Q24 and no repeat of that quarter’s Bt100mn maintenance cost.

Action & Recommendation. SCGP's share price is down 25.0% YTD and is trading at -1.5SD of its PE mean, indicating negatives are already priced in. We have also observed a significant drop in short-selling volume for SCGP. We maintain Outperform with a TP of Bt40 based on -1SD of PE mean of 25.9x. We expect the earnings turnaround in 2024 to bring impetus to share price.

Key risks are a continued slow economy in China and geopolitical unrest raising coal cost. Key ESG risks are energy management, sustainability products, and high greenhouse gas emissions (E).