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This article first appeared in The Edge Financial Daily on June 1, 2018

SKP Resources Bhd
(May 31, RM1.50)
Maintain outperform with an unchanged target price (TP) of RM2.22:
SKP Resources Bhd reported a net profit of RM127.1 million (+22.9% year-on-year [y-o-y]) for financial year 2018 (FY18), coming in just slightly off our and the consensus full-year estimates at 95% and 96% respectively. The group saw another sequential drop in revenue (-10% quarter-on-quarter [q-o-q]) and earnings (-5% q-o-q) on a slight reduction in orders from one of its key customers, though not a particularly worrisome trend as we see improvements in subsequent quarters coming from growth in other product segments. There is also scope for margin expansion as it continues to vertically integrate its manufacturing processes, with an eye on implementing greater levels of automation to improve efficiencies. The share price, similar to its peers, has taken a beating in recent months owing to much-publicised development in which a key customer was reported to have said it would cease the development of an existing product for a more technologically advanced version. While undeniably negative in the mid to long term, we believe new orders of other product lines will eventually come in to mitigate shortfalls, though not necessarily in similar quantums. We continue to like SKP’s growth prospects nonetheless and affirm our “outperform” call with an unchanged TP of RM2.22 based on a 15 times multiple of calendar year 2019 earnings per share.

 

Revenue of RM466.8 million (-20.4% y-o-y; -10% q-o-q) was a decline owing to a slight reduction in orders from one of its key customers, though not a particularly worrisome trend as this had been somewhat anticipated. Growth is starting to come in from other product segments, though not particularly pronounced at this juncture. The group’s medium-term prospects continue to be underpinned by the two key contracts it secured in late 2015 and mid-2016, which typically run through a five- to six-year life cycle. The net profit margin of 6% was in line with expectations, with fluctuations minimised through a 100% cost pass-through arrangement with its key customers.

The group continues to make encouraging headway in its printed circuit board assembly business, with more significant contributions seen in the coming financial year as it steps up on bidding for certain contracts with its key customers. The group has also indicated that it will step up its levels of automation to improve on efficiencies and reduce labour costs, more so with the impending minimum wage hike as proposed by the new government for the next five years.

We continue to like the growth attributes of SKP and its strong financial position. Further rerating catalysts include securing of new contracts given its ample unused capacity, venturing into new production and expansion of its client base. — PublicInvest Research, May 31

 

 

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