2Q23 net profit beat INVX by 11% and consensus by 8% on better cost reduction than anticipated. We expect earnings to gradually improve in 2H23F on continued reduction in cost, both for raw materials and energy, and expect better Thai and Indonesian operations after 2Q23 long holidays plus entry into high season for packaging
2Q23 net profit Bt1.49bn, +21.7% QoQ, -20.0% YoY, beating INVX by 11% and the market by 8% on better-than-expected cost control. The QoQ growth reflected lower overall cost including: 1) a continued fall in raw material (RCP) costs in 2Q23, as the 3-4-month lag kicked in and 2) a continued decrease in the price of coal (to US$85/ton in 2Q23 from US$100/ton in 1Q23, and currently at US$69/ton).
2Q23 highlights. Revenue was Bt32.2bn, down 4.0% QoQ on a 5% QoQ slip in Integrated packaging sales (74.8% of total sales) in Indonesia from its long Hari Raya festival, partially offset by a 3% QoQ rise in fibrous sales (21.3% of sales) due to more sales volume and wider spread for dissolving pulp, thanks to stronger textile demand in China and higher demand for printing & writing paper brought by Thailand’s election and new school term. On the cost side, the improvement primarily came from raw material, freight and energy costs, which led to a higher EBITDA margin for both integrated packaging and fibrous units; profit was also supported by increased sales volume for foodservice packaging and printing & writing paper. As a result, overall gross margin improved to 18.2% (+600bps QoQ) in 2Q23.
Continued rise in 2H23F. We expect earnings to grow in 3Q23 on the resumption of overall packaging demand to a normal level as China’s imports of packaging paper returns to pre-COVID level plus entry into high season for overall packaging demand and continued reduction in overall cost (raw materials and coal). SCGP has budgeted Bt9.0bn for M&P this year, opening the door for more earnings upside over the rest of the year. Though 1H23 was only 38% of our 2023F, we maintain our projection.
Potential for capex investment in 2024 to acquire additional shares in PT Fajar Surya Wisesa (Fajar), a listed company in Indonesia, which would raise SCGP's holding to 99.7% (from 55.23% now); deal completion is expected in the second half of 2024. Transaction value is estimated at ~Bt23.2bn, with Bt6bn to be funded by operating cash flow and the rest by debt. SCGP is looking for partners to invest in Fajar, which is expected to enhance synergy and cross-selling.
Dividend on 1H23. SCGP will pay a dividend of Bt0.25/share on 1H23, XD Aug 8.
Action & Recommendation. We believe SCGP’s 29.8% YTD fall in share price incorporates the negatives and we expect core earnings to continue improving in the next couple of quarters, limiting downside risk for the stock. We maintain our Outperform rating with end-2023 TP of Bt52.00 based on its PE mean of 31.6x.
Key risks: A slower pace in China’s reopening, and impact of global recession.
PDF Click > PETRO230726_E
