SKP Resources’ Tecnic buy viewed positively by analysts

-A +A

KUALA LUMPUR: SKP Resources Bhd’s proposal to acquire sister company Tecnic Group Bhd’s subsidiaries have been positively received by analysts, with the highest revised target price at RM1.10, implying an upside of 65.41% from SKP’s close of 66.5 sen last Friday.

As the electronics manufacturing service provider diversifies its exposure to other sectors in plastic component manufacturing, SKP’s reliance on British electrical appliance brand Dyson as an income contributor will be reduced to 45% from the current 65% to its annual revenue.

SKP executive director Ivan Gan Poh San told The Edge Financial Daily that the acquisition of Tecnic’s units Plastictecnic (M) Sdn Bhd, Sun Tong Seng Mould-Tech Sdn Bhd and Bangi Plastic Sdn Bhd for RM200 million, will also grow the group’s operations and provide it with more cost-savings, going forward.

“While we can’t put a figure as to how much costs we will save, the biggest areas that can see cost-savings will be human resources and procurement. And obviously, with an enlarged entity, there will be more visibility, more liquidity,” he said.

“The combined market capitalisations of both companies (SKP and Tecnic) are RM800 million. More funds and insurance will be happy to come in as SKP becomes a big entity,” he said.

As of last Friday, SKP’s market capitalisation stood at RM598.50 million, while Tecnic, which closed at RM5.19, has a market value of RM209.66 million.

Gan said SKP will also be exposed to more marquee clients and be able to diversify more in its product offerings once the acquisition is completed.

“We will diversify from the electrical and electronic component (E&E) sector. Tecnic has excellent exposures in E&E, food and beverage, and lubricant packaging sectors,” he said, adding that is how Dyson’s contribution to the annual revenue could be reduced to around 45%.

TA Securities, who revised its target price on SKP last Friday to RM1.10 from 77 sen, said there will be better value-added services once SKP and Tecnic are consolidated.

“The enlarged entity will be among the largest plastic contract manufacturers in Malaysia. This will allow better customisation of its mould in the plastic injection and blow moulding business. Noting the increased production capacity from the acquisition, it would also be able to rebalance its product mix and better tailor its services to suit the demand of customers,” said TA analyst Paul Yap in a note.

He also estimated an 8%-16% accretion to SKP’s earnings per share for its financial years ending March 31, 2016 (FY16) and 2017 (FY17).

RHB Research Institute Sdn Bhd analyst Fong Kah Yan also thinks the acquisition price of RM200 million — which will be satisfied with RM100 million cash and 172.4 million SKP shares worth 58 sen apiece — is value-accretive. The price tag values Tecnic’s subsidiaries at 11.34 times price-earnings (PE) ratio for the four quarters ended June 30, 2014.

“The acquisition is value accretive, given SKP’s current PE of 13.7 times (as at last Monday). 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.”

RHB raised its fair value on SKP to 85 sen from 71 sen, which implies a 27.82% upside from last Friday’s close, and recommended a “buy” on the group.

This article first appeared in The Edge Financial Daily, on October 7, 2014.