This article first appeared in The Edge Financial Daily on November 28, 2017

SKP Resources Bhd
(Nov 27, RM2.02)
Maintain outperform with a higher target price (TP) of RM2.39: SKP Resources Bhd’s first half financial year 2018 (1HFY18) net profit of RM68.4 million saw a growth of 67.1% year-on-year (y-o-y) and is within our and consensus expectations at 50.9% of full-year estimates. We are lifting our FY18-FY20 earnings estimates by between 5% and 25% however, as we account for stronger production in the years ahead while also enjoying margin expansions as it continues to vertically integrate its manufacturing processes.

Revenue of RM594.2 million in the second quarter of FY18 (2QFY18) saw a 30.2% growth y-o-y and a 15.2% growth quarter-on-quarter (q-o-q) and follows the same trend as previous quarters, which is a reflection of the group’s production from the two key contracts it secured in late-2015 and mid-2016 kicking into high gear. Net profit margin was slightly lower at 5.9% for the quarter largely due to product mix, but is expected to average 6% for the year. Net profit for the quarter was RM35.1 million, a 54.4% growth y-o-y and 5.2% growth q-o-q.

The group has recently increased its workforce to cater to growing customer demands and stands ready with necessary quotas in hand to strengthen its foreign labour workforce by another 33% should the need arise. This will ensure its previous labour-related issues, and subsequent negative impacts on margins will not recur. Any potential reimposition of foreign workers’ levies on employers should be a non-event, with the financial impact possibly mitigated as it is partially passed on to customers. The Printed Circuit Board Assembly (PCBA) business will see the group commencing production for two new customers. Contributions will be small at this point, but is in the right direction towards its aspirations for vertical integration.

We continue to like the growth attributes of SKP Resources and its strong financial position. Further rerating catalysts include the securing of new contracts given its ample unused capacity and venturing into new production and expansion of its client base. Our outperform call is maintained with a raised TP of RM2.39 on an 18-times multiple to calendar year 2018 earnings per share (EPS) of 13.3 sen (previously RM1.61 on a 15-times multiple to FY18 EPS of 10.7 sen). We see the change in valuation metrics and higher multiples justifiable given its bright prospects amid a multi-year growth spurt, tapping on the growing demands of its key customers. No dividend was declared in the current financial quarter. — PublicInvest Research, Nov 27