Introduction

SCG Packaging PCL (SCGP), a leading integrated packaging solutions provider, has been evaluated comprehensively by UOB Kay Hian. The company, organized into three core businesses—integrated packaging, fibrous solutions, and recycling—has faced challenging market conditions recently. This report delves into its financial performance, strategic outlook, and the analyst’s recommendations.

Overview of SCGP’s Financial Performance

The report projects SCGP’s 4Q24 net profit at merely Bt36 million, a steep decline of 94% quarter-on-quarter (qoq) and 97% year-on-year (yoy). This underperformance is attributed to weak demand across its core businesses and increased losses from its subsidiary, Fajar. Despite this, a recovery in 1Q25 is anticipated, buoyed by economic stimulus measures in Thailand and China.

4Q24 Results Preview

The 4Q24 performance reflects the challenges SCGP faces, including weak demand in its integrated packaging and recycling businesses, reduced sales volume in the fibrous business due to maintenance shutdowns, and higher loss recognition from Fajar.

Key Challenges Affecting SCGP

• Declining Demand: Packaging demand remains weak due to China’s increased domestic production, Europe’s sluggish economy, and Thailand’s reduced orders caused by the implementation of the Easy e-Receipt measure.
• Lower Margins: The EBITDA margin for the integrated packaging business is expected to decline to 10.2% in 4Q24 from 11.7% in 3Q24.
• Fajar Losses: SCGP raised its stake in Fajar from 55% to 99.72%, which resulted in higher loss recognition. However, restructuring efforts have shown signs of improvement, with Fajar’s 4Q24 losses expected to narrow compared to 3Q24.

Strategic Outlook for 1Q25 and Beyond

The company anticipates a recovery in 1Q25, driven by:

• Improved Demand: Economic stimulus measures in Thailand and China are expected to boost packaging demand.
• Cost Efficiencies: Lower recycled paper prices are likely to improve EBITDA margins.
• Fajar Turnaround: Adjustments to Fajar’s business plan are expected to reduce losses significantly, with the subsidiary projected to achieve net profit breakeven by 4Q25.

Fajar’s Turnaround Plan

SCGP remains committed to turning around Fajar’s performance by focusing on:

• Optimizing Costs: Lowering production expenses by improving raw material sourcing and fuel cost ratios.
• Expanding Markets: Exploring new export markets such as Vietnam, the Middle East, and the US while reducing reliance on China.
• Financial Restructuring: Refinancing loans to bring down interest rates from 6-7% to 3-3.5%.

The turnaround plan is expected to yield substantial benefits, with Fajar projected to break even in EBITDA by 2Q25 and in net profit by 4Q25.

Revised Earnings Forecasts

UOB Kay Hian has revised SCGP’s earnings forecasts for 2024 and 2025 downward:

• 2024: Net profit forecast reduced by 16% to Bt3.79 billion, reflecting a 28% yoy decline.
• 2025: Net profit forecast lowered by 9% to Bt4.1 billion, representing an 8.1% yoy growth.

The adjustments are attributed to slower-than-expected demand recovery and reduced gross profit margin projections.

Valuation and Recommendation

UOB Kay Hian maintains a HOLD rating for SCGP with a revised target price of Bt19.00 for 2025. The valuation is based on a regional forward PE of -2SD at 19.9x. The recovery in 2H25, supported by Fajar’s turnaround and economic stimulus measures, could position SCGP as a more attractive investment opportunity.

Environmental, Social, and Governance (ESG) Initiatives

SCGP demonstrates a strong commitment to ESG principles:

• Environmental: Focus on sustainable packaging solutions, recyclable materials, and energy-efficient manufacturing processes.
• Social: Investment in employee welfare, training, and community engagement initiatives.
• Governance: Strong board oversight with committees dedicated to audit, risk management, and sustainability.

Conclusion

SCGP faces a challenging operating environment, but strategic initiatives, including the Fajar turnaround and economic stimulus measures, could drive recovery in 2025. While the current HOLD recommendation reflects short-term uncertainties, long-term prospects may become more appealing as market conditions improve and restructuring efforts bear fruit.