SKP likely to secure new contracts with PCBA roll-out

TheEdge Mon, Dec 03, 2018 10:16am - 5 years View Original


SKP Resources Bhd
(Nov 30, RM1.13)
Maintain outperform with a lower target price (TP) of RM1.35:
SKP Resources Bhd reported a mediocre net profit (NP) of RM28.1 million for the second quarter of financial year 2019 (2QFY19) (+9% quarter-on-quarter [q-o-q], -20% year-on-year [y-o-y]), bringing NP for the cumulative first half of FY19 (1HFY19) to RM53.9 million. The main culprits were the dwindling uptake of its conventional electrical appliances as well as slower-than-expected new contract replenishments. As expected, no dividend was declared for the quarter under review.

 
On a y-o-y basis, 1HFY19 revenue dropped 19% on normalisation from the high base in 1HFY18 (with 2QFY18 as a record quarter), alongside a slower uptake in conventional electrical appliances following the shift of its main customer to the evolutionary model. With a lower operational efficiency, earnings before interest and tax (Ebit) margin compressed to 7.4% (0.6 percentage point [ppt]), resulting in a further drop of 21% in its profit after tax and minority interest (Patmi) level. On a q-o-q basis, 2QFY19 revenue improved 11% on stronger seasonality in tandem with year-end sales. With a stable Ebit margin of 7.3% (-0.2 ppt) and an effective tax rate of 23.5% (+0.4 ppt), NP improved by a similar quantum of 9%.

While we are cognisant of the softening revenue trend of new product focus from its main customer, we remain positive about the group securing new contracts after the commencement of its printed circuit board assembly (PCBA) services in February 2019. Recall that the group still has about 50% of floor space to cater for new contracts while consolidating its Vertical Integration status (with PCBA + Battery pack capability) to improve the strike rate of clinching more new contracts. Post results, we cut our FY19/FY20 core net profit estimates to RM119 million/RM140 million (-8%/-1%) to account for lower revenues from the conventional electrical appliances. Even with our further downward revision, we still opine that the current share price weakness is unjustified.

Maintain “outperform” with a lower TP of RM1.35 (from RM1.45). All in, our TP is lowered to RM1.35, based on a rollover FY20 PER estimate of 12 times. — Kenanga Research, Nov 30

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