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MALAYSIA
INVESTMENT RESEARCH REPORT
KDN PP13226/04/2013 (032022)
JF APEX SECURITIES BERHAD
(47680-X)
Initiating Coverage
14 April 2015
SCH Group Berhad
BUY
Good proxy to the construction boom
Share Price
Target Price
RM0.295
RM0.34
Investment Highlights

SCH Group (SCH) is a well established quarry
equipment & machinery and spare parts supplier in
Malaysia, having more than 25 years of experience,
capabilities and knowledge in the quarry industry. This
under-researched counter deserves a re-rating given its
strong fundamental, benefiting from a slew of infrastructure
works (namely railway and highway projects to be kicked
off locally) and its ambitious plan for regional expansion.
We initiate coverage on SCH with a target price of
RM0.34, based on 13x FY2016F PE. The stock could
reward investors with 22% return (inclusive of its
attractive dividend yield of 6.8%).

Best proxy to the construction sector. We reckon that
the Group would benefit from the booming domestic
construction sector as it is closely tied with the quarrying
industry. Take off of several high profile and sizeable
infrastructure works, namely railway (KVMRT 2, LRT 3 and
proposed HSR), highway projects (WCE, EKVE, Pan-Borneo
highway) and RAPID in Pengerang could benefit SCH
significantly. Our study indicates that the Group’s sales
growth for the supply of spare parts segment is positively
correlated to the GDP growth of the construction sector.
Whilst sales growth for the supply of machineries segment
is negatively correlated to the construction growth, we
believe the inverse relationship is mainly due to capex
spending on quarry machineries is traditionally ahead of the
start of physical mining works to accommodate the demand
of construction aggregate.

Better thematic play on construction boom? Investors
who aim for thematic and fundamental plays for take-off of
infrastructure projects locally should look at SCH due to its
impressive margins. We opine that topline growth of
construction companies may not necessary translate into
their bottomline growth and share price performance could
be highly hinged on newsfllows. Construction companies
could face the risk of margin squeeze as competitive bidding
for the high-profile mega projects would hamper the
contractors’ operating margins moving forward whilst
building material players, namely cement and steel
companies are now facing heightening competition and
overcapacity issues.

Topline supported by sizeable recurring income
whilst bottomline boosted by commendable margin.
The majority of SCH’s revenue is derived from supply of
spare parts for industrial usage and machinery. We reckon
that this segment of income contribution is more resilient
and steadier due to wear-and-tear of quarry machinery &
equipment which requires regular maintenance and service
Company Description
SCH Group Berhad, through its subsidiary,
imports, distribute and supplies industrial spare
parts for quarry equipment.
Stock Data
Bursa / Bloomberg code
Board / Sector
Syariah Compliant status
Issued shares (m)
Par Value (RM)
Market cap. (RM’m)
52-week price Range
Beta (against KLCI)
3-m Average Daily
Volume
3-m Average Daily Value
0161 / SCHG MK
Main / Ind-Prod
Yes
412.23
0.10
121.61
RM0.20-0.33
N.A
4.18m
RM1.16m
Share Performance
Absolute (%)
Relative (%-pts)
1m
9.26
5.68
3m
7.27
16.24
Major Shareholders
12m
25.53
26.18
%
18.2
14.2
14.2
Mong Ling Lau
Sin Chin Wong
Yoon Hin Yeen
Historical Chart
Source: Bloomberg
The Research Team
03-87361118, ext. 758 / 755
[email protected]
Target Price: RM0.34
Please read carefully the important disclosures at end of this publication
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
as compared to supply of machinery which is considered
‘one-off’ and is subject to capex spending of quarry
operators. The former has contributed 60-65% to the
Group’s topline from FY2011 till FY2014 against the latter’s
16%. Meanwhile, SCH has been enjoying remarkable gross
profit margin of 35-38% over the past few years thanks to
its direct relationship with end customers and better product
mix.

Attractive dividend yield and sturdy balance sheet.
While SCH does not maintain any dividend policy, we
believe the Group will still reward shareholders handsomely.
We envisage SCH to declare 2 sen dividend each for
FY2015F and FY2016F, which are higher than 1 sen paid
out in FY2014. Thus, this will translate into decent dividend
yield of 6.8%. Currently, the Group is in net cash position.
Earnings Outlook

We estimate the Group’s FY2015F and FY2016F net
earnings to perform strongly, up 24.4% and 22.1%
respectively on the back of higher revenue expected
(FY15F: +10.0%; FY16F: +18.6%) and continuous margin
expansion pursuant to pick up in construction activities.
Valuation/Recommendation

We initiate coverage on SCH with a target price of
RM0.34, based on 13x FY2016F PE, which is at upcycle PE
of small cap stocks in view of anticipated booming
construction and quarry industries.
Risk

Delay in award of infrastructure projects.

Termination of distribution rights for machineries
supply, either new or reconditioned.

Credit risk in relation to credit term extended to clients as
the Group normally renders 90-180 days term for its supply
of spare parts.
2
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Background
SCH Group Berhad was listed on the ACE Market of Bursa Malaysia on 13 February 2014. SCH Group is a
well-established quarry supplier for the quarry industry, having more than 25 years of experience,
capabilities and knowledge in the quarry industry.
The Group is principally involved in the business of distribution and supplying of quarry industrial
products, quarry machinery and equipment (M&E), and reconditioned quarry machinery as well as supply
of spare parts for M&E to the quarry industry in Malaysia and South East Asia. The Group is also involved
in the manufacturing and distribution of quarry grill.
The Group products are categorized under four (4) main business segments, as illustrated in the diagram
below:Figure 1: SCH’s Main Business Segments
Source: Company, JF Apex
3
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
The Group’s subsidiaries and branch offices are strategically located in various states in Malaysia with
high quarry operations as well as Singapore. SCH Group Berhad has an experienced servicing team to
provide value added after-sales service to their customers with immediate response time or a maximum
of 24 hours for outside Klang Valley. The Group has in-house expertise to recondition Junjin CSM
hydraulic crawler drills.
Figure 2: Group’s Distribution Network
Source: Company, JF Apex
4
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Figure 3: Quarry Industrial Products
Source: Company, JF Apex
5
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Figure 4: Quarry Machinery & Quarry Equipment (M&E)
Source: Company, JF Apex
6
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Figure 5: Reconditioned Quarry Machinery
Source: Company, JF Apex
7
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Figure 6: Spare Parts for Quarry Machinery, Quarry Equipment and Reconditioned Machinery
 SCH Group supplies a full range of spare parts for their quarry machinery and quarry equipment.
Source: Company, JF Apex
8
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Figure 7: Group Factory and Quarry Grills
 Flat Top grills have longer span (approximately 1.5 times) of conventional Double Wave grills

SCH's custom Diamond Shape grills have double the life span of the double wave grills and
produce 20% more output.
Source: Company, JF Apex
9
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Figure 8: Full Range of Group Quarry-Based Products
Source: Company, JF Apex
10
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES
Figure 9: SCH’s Factory, Warehouse & Products
Source: Company, JF Apex
11
14 April 2015
JF APEX SECURITIES
Initiating Coverage – SCH Group Berhad
Investment Merits

Integrated quarry service provider. SCH is capable of supplying a wide range of products and
services to the whole quarrying process chain of an open-pit mine. Comprehensive range of products
range from quarry industrial products, quarry machinery (new and reconditioned from Japan and
Korea), spare parts for machinery as well as manufacturing of quarry grill. Besides, the Group also
provides its customers with prompt value added after-sale service and technical support in order to
minimise their downtime and maintenance costs.

Wide geographical coverage with future plan of regional expansion. SCH has a strong
presence in local and overseas markets with its wide distribution network strategically located in
Selangor, Penang, Pahang, Johor, Sabah, Sarawak and Singapore, which covers overseas markets
especially Indonesia. These areas cover the major quarry operators, quarry sites and plants. Moving
forward, SCH plans to expand its business further into Indochina particularly in Cambodia and
Myanmar to ride on the infrastructure boom there.

Best proxy to the construction sector. We reckon that the Group would benefit from the
booming domestic construction sector as it is closely tied with the quarrying industry. Take off of
several high profile and sizeable infrastructure works, namely railway (KVMRT 2, LRT 3 and proposed
HSR), highway projects (WCE, EKVE, Pan-Borneo highway) and RAPID in Pengerang could benefit
SCH significantly. Our study indicates that the Group’s sales growth for the supply of spare parts
segment is positively correlated to the GDP growth of the construction sector. Whilst the sales growth
for the supply of machineries segment is negatively correlated to the construction growth, we believe
the inverse relationship is mainly due to capex spending on quarry machineries that is traditionally
ahead of the start of physical mining works to accommodate the demand of construction aggregate.
Figure 10: Construction Projects (Current & Porposed)
Type of Projects
Descriptions
Infrastructure
KVMRT 2, LRT 3, Pan Borneo Highway, WCE, EKVE, SUKE, RAPID in
Pengerang, HSR (Proposed), Monorail extension (Proposed)
Building
TRX, KL118, Bandar Malaysia, Kwasa Land in Sg Buloh
Source: Media, JF Apex
Figure 11: Relationship Between Local Construction Growth & The Group’s Sales Growth
40.0%
30.0%
%
20.0%
10.0%
0.0%
-10.0%
2011
2012
2013
2014
-20.0%
-30.0%
GDP growth - Construction
Sales growth - supply of spare parts
Sales growth - supply of machineries
Source: MOF, Company, JF Apex
12
14 April 2015
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES

11th Malaysian Plan to reassure construction job flows for coming years and hence
positive to the quarry industry. 11th MP, to be announced in May/June this year, being the last
push to achieve developed nation status by 2020, plays a pivotal role to ensure sustainability of
economic growth moving forward. We reckon that construction sector will continue to be the
backbone of the future economic growth due to its multiplier effect to the whole economy. Thus, we
envisage the announcement of 11th Malaysian Plan (from 2016-2020) will entail a list of
infrastructure development for the nation and hence excites share price performance of M&E
suppliers, such as SCH, apart from construction and building material companies.

Better thematic play on construction boom? Investors who aim for thematic and fundamental
plays for take-off of infrastructure projects locally should look at SCH due to its impressive margins.
We opine that topline growth of construction companies may not necessary translate into their
bottomline growth and share price performance could be highly hinged on newsfllows. Construction
companies could face the risk of margin squeeze as competitive bidding for the high-profile mega
projects would hamper the contractors’ operating margins moving forward whilst building material
players, namely cement and steel companies are now facing heightening competition and
overcapacity issues.

Topline supported by sizeable recurring income whilst bottomline boosted by
commendable margin. The majority of SCH’s revenue is derived from supply of spare parts for
industrial usage and machinery. We reckon that this segment of income contribution is more resilient
and steadier due to wear-and-tear of quarry machinery & equipment which requires regular
maintenance and service as compared to supply of machinery which is considered ‘one-off’ and is
subject to capex spending of quarry operator. The former has contributed 60-65% to the Group’s
topline from FY2011 till FY2014 against the latter’s 16%. Meanwhile, SCH has been enjoying
remarkable gross profit margin of 35-38% over the past few years thanks to its direct relationship
with end customers and better product mix.

Attractive dividend yield and sturdy balance sheet. While SCH does not maintain any dividend
policy, we believe the Group will still reward shareholders handsomely. We envisage SCH to declare
2 sen dividend each for FY2015F and FY2016F, which are higher than 1 sen paid out in FY2014.
Thus, this will translate into decent dividend yield of 6.8%. Currently, the Group is in net cash
position.
13
14 April 2015
JF APEX SECURITIES
Initiating Coverage – SCH Group Berhad
Financial Review & Outlook
SCH recorded an overwhelming 1QFY15 net profit of RM4.5m, doubled from RM2.2m
registered in 1QFY14 mainly attributable to higher revenue achieved under supply of quarry M&E and
reconditioned machinery with relatively higher margin and spare parts’ sales. Overall, we expect the
Group to chalk up RM72.2m revenue (+10.3% yoy) and RM9.0m net profit (+24.4% yoy) for FY2015F.
Moving into FY2016F, we envisage the Group’s revenue and net earnings to grow further by
18.6% yoy to RM85.6m and 22.1% yoy to RM10.9m respectively, continued to be driven by
supply of machinery for both new and reconditioned, spare parts as well as manufacturing of grill in view
of take-off of several highways and railways projects.
Figure 12: Financial Summary
FYE 31 Aug
FY2014
(RMm)
65.4
24.6
10.3
-3.2
7.2
7.2
37.6%
15.7%
-31.1%
6.7%
15.5%
-1.9%
-6.5%
412.2
1.75
16.9
1.0
57.3%
3.4%
-7.6%
11.6%
8.2%
FY2015F
(RMm)
72.2
27.1
12.3
-3.3
9.0
9.0
37.6%
17.0%
-27.0%
10.3%
10.3%
19.1%
24.4%
412.2
2.17
13.6
2.0
92.1%
6.8%
-3.9%
12.5%
8.9%
FY2016F
(RMm)
85.6
32.3
15.0
-4.0
10.9
10.9
37.8%
17.50%
-27.0%
18.6%
19.1%
22.1%
22.1%
412.2
2.65
11.1
2.0
75.4%
6.8%
-2.3%
13.1%
9.6%
Balance Sheet
Cash
Current assets
Non-current assets
Total assets
20.9
74.5
13.2
87.7
19.8
85.7
14.5
100.2
19.7
98.5
16.0
114.5
Short term debt
Current liabilities
Long term debt
Non-current liabilities
Total liabilities
14.5
23.7
1.7
2
25.7
15.2
26.1
1.8
2.2
28.3
16.0
28.7
1.9
2.4
31.1
Shareholders' equity
MI
Total equity
62
0
62
71.9
0.0
71.9
83.4
0.0
83.4
87.7
100.2
114.5
Revenue
Gross Profit
PBT
Taxation
PAT
Net Profit
GP margin
PBT margin
Effective tax rate
Revenue growth
Gross profit growh
PBT growth
Net profit growth
No. of shares
EPS (sen)
P/E (x)
DPS (sen)
Dividend payout
Dividend Yield
Net gearing / (cash)
ROE
ROA
Total liabilities & equity
14
14 April 2015
JF APEX SECURITIES
Initiating Coverage – SCH Group Berhad
Cash Flow
Cash flow from operations
Cash flow from investing
Cash flow from financing
Cash generated
Cash at beginning
Cash at end of period
0.6
-1
15.1
14.7
2.2
16.9
3.0
-1.1
-3.0
-1.1
16.9
15.8
4.5
-1.2
-3.3
0.0
15.8
15.7
FY2014
(RMm)
15.7
FY2015F
(RMm)
18.8
FY2016F
(RMm)
23.6
16
0.87
3
18
0.90
4
21
0.92
6
ASP of machinery
Other machineries sold
ASP of other machineries
0.55
5
0.06
0.58
6
0.07
0.61
8
0.07
b) Supply of spare parts
Growth
44.7
25.90%
47.8
7.00%
56.0
17.00%
5.0
-14.40%
5.5
10.00%
6.1
10.00%
24.0%
68.3%
7.6%
26.1%
66.3%
7.6%
27.6%
65.4%
7.1%
Assumptions
Semental revenue
a) Supply of machineries
No. of hydraulic crawler drill
sold
ASP of machinery
No. of VSI sold
c) Manufacturing (grill)
Growth
Segmental revenue
contribution
Supply of machineries
Supply of spare parts
Manufacturing (grill)
Source: Company, JF Apex
Risks

Delay in award of infrastructure projects.

Termination of distribution rights for machineries supply, either new or reconditioned.

Credit risk in relation to credit term extended to clients as the Group normally renders 90-180 days
term for its supply of spare parts.
Valuation & Recommendation
We initiate coverage on SCH with a target price of RM0.34, based on 13x FY2016F PE, which is at
upcycle PE of small cap stocks in view of anticipated booming construction and quarry industries. The
stock could reward investors with 22% return (inclusive of its attractive dividend yield of 6.8%).
15
14 April 2015
JF APEX SECURITIES
Initiating Coverage – SCH Group Berhad
JF APEX SECURITIES BERHAD – CONTACT LIST
JF APEX SECURITIES BHD
DEALING TEAM
RESEARCH TEAM
Head Office:
6th Floor, Menara Apex
Off Jalan Semenyih
Bukit Mewah
43000 Kajang
Selangor Darul Ehsan
Malaysia
Head Office:
Kong Ming Ming (ext 3237)
Shirley Chang (ext 3211)
Norisam Bojo (ext 3233)
Head Office:
Lee Chung Cheng (ext 758)
Lee Cherng Wee (ext 759)
Jessica Low Jze Tieng (ext 756)
General Line: (603) 8736 1118
Facsimile: (603) 8737 4532
PJ Office:
15th Floor, Menara Choy Fook On
No. 1B, Jalan Yong Shook Lin
46050 Petaling Jaya
Selangor Darul Ehsan
Malaysia
Institutional Dealing Team:
Lim Teck Seng
Sanusi Bin Mansor (ext 740)
Fathul Rahman Buyong (ext 741)
Ahmad Mansor (ext 744)
Lum Meng Chan (ext 743)
Zairul Azman (ext 746)
Norsyafina binti Mohamad Zubir (ext 755)
Low Zy Jing (ext 754)
PJ Office:
Mervyn Wong (ext 363)
Azfar Bin Abdul Aziz (Ext 822)
Tan Heng Cheong (Ext 111)
General Line: (603) 7620 1118
Facsimile: (603) 7620 6388
JF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK
STOCK RECOMMENDATIONS
BUY
: The stock’s total returns* are expected to exceed 10% within the next 12 months.
HOLD
: The stock’s total returns* are expected to be within +10% to – 10% within the next 12 months.
SELL
: The stock’s total returns* are expected to be below -10% within the next 12 months.
TRADING BUY
: The stock’s total returns* are expected to exceed 10% within the next 3 months.
TRADING SELL : The stock’s total returns* are expected to be below -10% within the next 3 months.
SECTOR RECOMMENDATIONS
OVERWEIGHT
: The industry as defined by the analyst is expected to exceed 10% within the next 12 months.
MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to – 10% within the next 12 months.
UNDERWEIGHT
: The industry as defined by the analyst, is expected to be below -10% within the next 12 months.
*capital gain + dividend yield
JF APEX SECURITIES BERHAD - DISCLAIMER
Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior
written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be
reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report.
Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of
JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend
this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate
set forth herein, changes or subsequently becomes inaccurate.
JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such
statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to
time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior
written approval of JF Apex Securities Berhad.
Published & Printed by:
JF Apex Securities Berhad (47680-X)
(A Participating Organisation of Bursa Malaysia Securities Berhad)
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