SKP Resources Bhd
(March 18, RM1.36)
Upgrade to outperform with a higher target price (TP) of RM1.45: While the first nine months of 2019 saw a slower uptake of SKP Resources Bhd’s electrical appliances after its main customer shifted to newer models, we expect its financial year 2020 (FY20) to see a recovery in its box-built orders, driven by new lifestyle products from its key customer, a new model variant for one of its conventional electrical appliances, and resilient orders of its personal care products with about 50% from Asia. In all, these should comfortably anchor our FY20 estimate top line of RM2.2 billion.

 
On the US-China trade war, we understand that SKP Resources had received multiple enquiries concerning its printed circuit board assembly (PCBA) and box-built capabilities. However, the group desires to remain selective as it focuses on existing swarming orders from its key customer.

SKP Resources’ first PCBA line is slated to commence in April 2019, and additional lines for newer products in September 2019. The new PCBA capability also paves the way for more contracts given the key customer’s emphasis — that its contract manufacturers be vertically integrated. Additionally, we estimate this would improve margins by about 0.5 percentage point. Currently, the group had identified a 2.2-acre (0.89ha) land and placed orders for new plastic injection machines in anticipation of new products, while its Johor plant still has about 50% of floor space to cater for new contracts.

Currently, SKP Resources is trading at a laggard FY20E price-earnings ratio (PER) of only 12.5 times compared with ATA IMS Bhd’s PER of 15 times. We believe the discrepancy could be due to the former lacking PCBA capabilities previously. However, with SKP Resources’ new PCBA capabilities, we believe the current valuations are unjustified, and thus should rerate closer to its peers with PCBA capabilities.

Take note that among its closest peers, SKP Resources also pays the highest dividend — a 50% payout — translating into a decent FY19 and FY20E dividend yields of 3.2% to 4.1%. All in, we see a more appealing risk-to-reward ratio from here.

After a meeting with management, we reduced our FY19E net profit by 8% on temporary slower orders from existing conventional electrical appliances, and increased FY20E net profit by 1% for housekeeping. However, we are unperturbed by our FY19E earnings reduction as we look forward to a strong FY20.

Therefore, we upgraded our rating to “outperform” from “market perform with a higher TP of RM1.45 from RM1.25 previously, based on a higher valuation of 14 times FY20 PER, close to its three-year average. Besides a decent upside of 10%, decent FY19 and FY20E dividend yields of 3.2% to 4.1% should appeal to investors. The risks to our call include lower-than-expected orders from its customers, higher input costs, and a single customer concentration risk. — Kenanga Research, March 18