SKP Resources Bhd
(Oct 3, RM0.665)
Maintain “buy” with target price of RM0.85. SKP has proposed to acquire three of Technic Group Bhd’s operating companies for RM200 million. The purchase consideration values the three companies at an acquisition price-to-earnings ratio (PER) of 11.3 times, based on their trailing four quarters profit after tax of RM17.6 million, which we consider fair.
We are positive on the acquisition as it will likely increase SKP’s market share and strengthen its position as a leading plastic component manufacturer, given the target companies’ strong capabilities in the precision, mould-designing and fabrication business.
The acquisition is a related party transaction as the major shareholder, Datuk Gan Kim Huat and family, currently collectively owns 70.5% and 68.7% in SKP and Tecnic respectively.
The purchase consideration will be funded by RM100 million of internally-generated funds and the remainder from the issuance of 172.4 million new SKP shares or 19.2% of existing share base at an issue price of 58 sen per share.
The shareholding of Gan and his family will drop to 68.4% from 70.5% after the proposed acquisition. The acquisition is expected to be completed by second quarter of 2015. As such, we keep our financial year 2015 (FY15) earnings forecast unchanged but raise our FY16 forecast by 22.9%, following the full consolidation.
For FY15 and FY16, its key customer Dyson Ltd’s sales are estimated to account for 58% and 54% of SKP’s total sales.
Key risks to our call include a weaker-than-expected macroeconomic environment, which could dampen consumer demand for electrical items, and loss of orders from Dyson.
Following the earnings upgrade from the proposed acquisition, we raise our target price to 85 sen from 75 sen previously, pegged to a FY16 PER of 11 times.
The stock is currently trading at an undemanding FY16 PER of 7.6 times. With a minimum payout policy of 50%, it also offers an attractive forecast dividend yield of 6.1% for FY16. — RHB Research, Oct 3
This article first appeared in The Edge Financial Daily, on October 7, 2014.