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This article first appeared in The Edge Financial Daily on January 20, 2020

SKP Resources Bhd
(Jan 17, RM1.55)
Maintain buy with a higher target price (TP) of RM1.75:
We reiterate our positive stance on SKP Resources Bhd on expectations of higher job orders, as well as a solid execution and a ramp-up in its new production lines. We also expect SKP Resources’ earnings to inflect from the third quarter ended Dec 31, 2019 (3QFY20), driven by a ramp-up in new production lines and normalised margins on tapering start-up expenses and an optimised operating efficiency.

We recently hosted a group meeting with SKP Resources, well attended by major institutional clients. We left feeling reassured on the company’s earnings growth prospects, underpinned by robust job order flows, as well as a solid execution and a ramp-up in new production lines.

Essentially, the management guided for a significant bump-up in capital expenditure to RM100 million for FY20, versus FY19’s RM29 million. We believe this is evidence of SKP Resources’ optimism and visibility for higher job order flows moving forward. After the meeting, our earnings forecasts for the financial year ending March 31, 2020 (FY20) to FY22 are revised by 2% to 10%.

We anticipate SKP Resources’ earnings to start inflecting and reflect positive year-on-year and quarter-on-quarter growth momentums from 3QFY20, on assuming a continuous sales ramp-up of new production lines and a favourable seasonality, for instance, year-end festivities. We also expect  a  normalisation of margins on tapering start-up expenses and improved operating efficiency for the company. Looking further, we forecast a FY21 earnings growth of 32.3% for SKP Resources, underpinned by full-year contributions from new products, the absence of start-up costs and an optimised operating efficiency.

Correspondingly with the earnings revision, our TP rises to RM1.75 from RM1.42, as we also raised the valuation bar to 15 times FY21 forecast price-earnings from 13.5 times. The more aggressive valuation is justified by more optimistic sales order expectations and reassured earnings visibility — this is concerning a ramp-up in new production lines, as guided by the management.

Notably, the valuation is consistent with the one we ascribed to close peer VS Industry Bhd. Notwithstanding a 22% run-up in share price since our upgrade in December 2019, we view the solid earnings delivery from 3QFY20 to further improve sentiments on the stock. Risks to our recommendation include lower-than-expected job wins and a market share loss to competitors. — RHB Research Institute, Jan 17

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