Transplanting seedlings from plastic trays to the field can cause transplanting shock, which negatively impacts their growth and development. Biodegradable seedling plug-trays are a potential solution, but their large-scale implementation is challenging due to a lack of machinery. In this study, we propose and develop a fully automated vegetable seedling transplanter that separates the seedling plug-cell from the biodegradable plug-tray for transplanting. The biodegradable plug-trays are prepared from the paper and cardboard waste mixed with strength enhancing additives. The plug-trays mechanism comprises two sub-mechanisms: a plug-trays aligning mechanism and a plug-trays separating mechanism. The former moves the plug-trays laterally and longitudinally to align each plug-cell at the seedling discharge point using a double helical grooved screw and a five-bar mechanism. The latter uses a blade assembly to separate the plug-cell from the tray, which falls through a seedling discharge tube to the hopper of the planter unit. Experimental trials showed that the system successfully separated 70% of the plug-cells from 35-day-old pepper and cabbage seedlings. The proposed mechanism has potential as a practical solution for the transplanting shock issue and can be optimized for larger-scale farming by reducing the stagnation count and developing a support system for separating the last two rows of the plug-tray.