SKP Resources may face prolonged weakness in order visibility, says CGS-CIMB

TheEdge Thu, Feb 15, 2024 04:36pm - 2 months View Original

KUALA LUMPUR (Feb 15): SKP Resources Bhd may face prolonged weakness in order visibility from its largest customer, CGS-CIMB said, warning that the company's earnings may fall 40.2% for the financial year ending March 31, 2024 (FY2024).

Subsequently, the research house slashed its target price (TP) for the electronic manufacturing services firm’s shares by 27% to 92 sen from RM1.26.

In a note on Thursday, CGS-CIMB said order visibility from SKP’s key customer, which accounted for 75% of its annual revenue, had dwindled on the back of inventory adjustments and weaker-than-expected end-consumer sentiment.

“Given this development, we take the opportunity to cut our EPS (earnings per share) forecasts for FY2024 to FY2026 by 20.2% to 25.8% as we assume a steeper revenue decline of 30% from the key customer in FY2024, from 16% previously,” it stated.

It noted that the earnings multiple implied in the TP of 13.4 times for SKP is lower than its peer VS Industry Bhd’s 16 times, reflecting the group’s large single-customer concentration risk despite offering a higher return on equity.

Furthermore, it cautioned against other downside risks, including the loss of market share to competitors, further order cuts stemming from weak customer sentiment, and the potential drag on margins due to rising labour costs.

Nevertheless, CGS-CIMB reiterated its “add” recommendation, equivalent to a "buy" call, betting on a pickup in orders and still-attractive valuations with the stock trading below its eight-year average on both price-earnings and price-to-book value multiples.

SKP has to diversify to new customers, which if successful, would be a key catalyst for the stock, CGS-CIMB said, noting that SKP has readily available floor production capacity of 650,000 sq ft in its new facility in Senai, Johor to take on new projects.

“While details are relatively scant at this juncture, we think the group may likely benefit from manufacturers’ relocation and diversification from China to Malaysia, with key advantages of having a strong manufacturing track record, mature supply chain and competitive labour cost,” it said.

CGS-CIMB said it remains optimistic that order visibility would pick up in FY2025 with the launch of new household care products spurring consumer spending positively.

Overall, it expects EPS for SKP to rebound by 25.4% in FY2025 and 18.3% in FY2026.

At the time of writing on Thursday, SKP’s share price was up by five sen or 6.85% to 78 sen, valuing the group at RM1.22 billion.

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