This article first appeared in The Edge Financial Daily on February 26, 2018
KUALA LUMPUR: SKP Resources Bhd, whose share price reversed its upward trend of late, could see a boost in earnings around the corner.
The company’s printed circuit board assembly (PCBA) service, which is expected to begin operation this year, will complement its electronic manufacturing services (EMS) — the core division of the company.
With the in-house PCBA capability, SKP Resources is expected to enjoy a wider profit margin and earnings growth will be broadly in line with other EMS players. SKP Resources currently sources PCB parts from other EMS players.
SKP Resources’ in-house PCBA capability could eventually turn into an integrated one-stop EMS service provider and enhance the group’s chances of bagging more contracts from its major customers, commented Kenanga Investment Bank Bhd analyst Desmond Chong in his latest financial result review last Friday.
Chong upgraded SKP Resources to “outperform” with an unchanged target price (TP) of RM2.05, noting that as the share price has retraced 16%, it presented a better risk-reward at this level.
SKP Resources’ share price soared to a record high of RM2.35 on Jan 8, climbing from the RM1.30-level in June last year. But its seven-month-long rally hit a bump after it climbed to a fresh peak — it headed south to a low of RM1.66 on Feb 12. It closed at RM1.87, a drop of two sen last Friday, with a market capitalisation of RM2.33 billion.
Last week, SKP Resources announced that its nine-month ended Dec 31, 2017 (9MFY18) net profit grew almost 38% year-on-year (y-o-y) to RM98.47 million from RM71.38 million while revenue climbed 20.69% y-o-y to RM1.64 billion from RM1.36 billion due to bigger purchases from existing key customers in the period.
However, its net profit slipped 1.25% to RM30.04 million for the third quarter ended Dec 31, 2017 (3QFY18), from RM30.42 million because of a drop in revenue by 10.57% despite a lower cost of sales and operating expenses as well as a difference in product mix.
“We understand that the blip in 3QFY18 was a non-recurring event with production already seeing normalisation now. Orders for its main revenue drivers, the beauty and household products, are still intact and would contribute at least RM1.7 billion to RM2 billion revenue in FY18 (ending March 31, 2018) and FY19, anchoring a two-year revenue compound annual growth rate (CAGR) of 16%,” said Kenanga’s Chong in the research note.
The Johor-based company, involved in tool and die fabrication, injection moulding and cosmetic finishing, and contract manufacturing and component assembly, boasts of a line-up of famous clientele, such as Panasonic Corp, Pioneer Corp, Flex Ltd (previously Flextronics International Ltd), Fujitsu Ltd, Sharp Corp and Sony Corp.
RHB Research analyst Soong Wei Siang concurred that the recent share price correction presented an opportunity for investors to accumulate the stock at a more reasonable valuation.
He said the stock is trading now at 13.5 times price-earnings ratio (PER) of FY19, which is below +0.5 standard deviation over a five-year mean, and upgraded the stock to “buy” from “neutral” with an unchanged discounted cash flow-derived target price of RM2.17 (15% upside).
“Its prospects are promising as we anticipate robust job flows moving forward, given the encouraging sales of its key customer’s products. Additionally, newer updates or variants of the products could be in the pipeline given the strong demand,” Soong added.