KUALA LUMPUR (Nov 20): Analysts have upgraded SKP Resources Bhd to reflect its strong order flow outlook and potential further margin expansion from higher contribution of its printed circuit board assembly (PCBA) operations.

CGS-CIMB's analyst Syazwan Aiman Sobri said in a note dated Nov 19 that SKP's 1HFY21 core net profit of RM54.1 million came in at 45% of his full-year forecasts.

The key reason was stronger-than-expected revenue recovery post-1QFY21, and better-than-expected earnings before interest, taxes, depreciation and amortisation margins due to better economies of scale.

"On the back of a strong quarter-on-quarter net profit recovery in 2QFY21, we expect order momentum to continue, leading to a strong 2HFY21," he said.

Despite ongoing concerns over the Covid-19 outbreak, he gathered that order flows from its key customers remain robust and should underpin a stronger 2HFY21.

"We think margins are likely to remain strong going into 2HFY21, underpinned by better economies of scale from stronger sales volumes, and margin expansion from increasing contribution from its PCBA operations, both of which were already seen in 2QFY21," he said.

He also raised his FY21 to FY23 earnings per share by 6.9% to 8.9% mainly to account for better order traction.

"As we turn more positive on SKP's prospects, we upgrade our call on the stock to an add (from hold), with our end-2021 target price (TP) now at RM2.35 (from RM1.60), based on a 17 times of 2022 price-to-earnings (PE) ratio," he said.

UOB-Kay Hian's analyst Desmond Chong also increased his FY21 to FY22 net profit forecasts for SKP by 5% and 18% respectively to account for additional contract wins from its key customers and margin improvement on better operational efficiency.

"SKP reported record-high revenue and profit in 2QFY21 on strong orders ramp-up from its key customers. We expect sales momentum to continue in 3QFY21, driven by festive demand and full-quarter contributions from new products," he said.

He has upgraded SKP to buy and lifted its TP to RM2.26, from RM1.46.

"SKP is trading at a 17% discount to peers' FY22 average PE amid expected two-year net profit compound annual growth rate of 44%," he said.

SKP yesterday announced that its net profit for the second quarter ended Sept 30, 2020 (2QFY21) surged 76.9% to RM44.07 million, from RM24.91 million a year ago.

Its revenue for 2QFY21 jumped 49.18% to RM726.31 million, from RM486.86 million.

The group said it delivered a sterling performance and posted its highest-ever quarterly revenue of RM726.3 million with profit before tax of RM57.8 million due to strong demand from existing key customers.

For the half year ended Sept 30, 2020, the group's net profit climbed 24.67% to RM54.1 million, from RM43.4 million a year earlier.

Its revenue for the half-year period also rose 32.43% to RM1.12 billion, from RM849.4 million.

The group said its prospects remain good and the board is optimistic and expects to achieve profit growth for the financial year ending March 31, 2021.

At noon break, the counter rose eight sen or 4.26% to RM1.96. It saw 10.88 million shares traded.