Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily, on October 12, 2015.

 

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SKP Resources Bhd

SHARES for SKP have done very well over the past one year. Confidence in the company was boosted after it bagged two contracts to manufacture cordless vacuum cleaners for UK-based Dyson.  

We believe much of the good news is already priced into its shares, which are now trading at a trailing P/E of 29 times. Nevertheless, investors can still look forward to rising dividends with good earnings visibility and solid balance sheet.

SKP is based in Johor. It manufactures plastic parts and components, precision mould making, sub-assembly of electrical equipment and other secondary processes for customers including Sharp, Sony and Hewlett-Packard. Prior to the new Dyson contracts, SKP had been manufacturing vacuum cleaners, hand dryers and bladeless fans for the former.

The new contracts are worth RM400 million and RM600 million over 5-years, the first starting this month while the second is scheduled to commence January 2016. Hence, the first full-year impact will be felt in FYMar2017.

Back of the envelope calculation — assuming current net margin of 7% (SKP is not exposed to forex movements) — suggests an annual profit contribution of RM70 million. Add that to annualised 1QFY16 results, net profit would total some RM142 million — meaning its FY17 P/E will drop to 10.4 times.

Importantly, SKP has a long track record of paying out around 50% of annual profits as dividends. At this payout ratio, yield would rise from the current 1.4% to about 4.8%.

Looking ahead, there is room for further growth. Including the latest contracts, its new plant in Senai is only 35% utilized.

Note that its 1QFY16 earnings included contributions from three newly acquired subsidiaries from Tecnic Group, which was completed in March 2015. The subsidiaries produce commercial lubricant packaging and tool fabrication for clients including Petronas, Nestle and Unilever. The new businesses account for some 25-30% of SKP’s revenue and are expected to see steady 8-12% annual growth.

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