SKP Resources Bhd
(April 15, RM1.41)
Upgrade to buy with a higher target price (TP) of RM1.65: To recap, after achieving a record revenue of +7.8% year-on-year (y-o-y) to RM2,095 million and earnings of +22.7% y-o-y to RM126.8 million in financial year 2018 (FY18), SKP Resources Bhd’s momentum subsided with nine months of FY19 revenue and earnings down 20.1% y-o-y and 21.9% y-o-y to RM1,307.8 million and RM76.9 million. This was mainly due to moderating demand for box build assembly services by a key customer as its older consumer electronics progress towards the later part of their life cycle.

The weak performance also saw SKP Resources’ share price falling 53.9% in 2018, albeit recovering 33.3% year to date. Take note of no significant changes in utilisation rates during the fourth quarter (4Q) of FY19; we maintained our expectations for the quarter’s earnings to remain lacklustre, within 3QFY19’s range of RM23.1 million — -17.4% quarter-on-quarter and -23% y-o-y.

However, we are still hopeful that its growth will resume in FY20 at +33% y-o-y, albeit mainly from the second half (2H) as prospective jobs undergo qualification during 1H. We are also encouraged about its maiden printed circuit board assembly (PCBA) services set-up will finally be commissioned at end-April 2019. While the current capacity would only partially cater to the group’s requirements, it would lend some support to margins as the reliance on outsourcing is reduced. Besides, we note the capital expenditure (capex) guidance for FY20 to FY21 has been revised higher to RM40 million from RM20 million per annum previously, with plans to expand its plastic injection capacity in addition to that for the PCBA.

Meanwhile, we still view the group has an advantage in capitalising on business opportunities arising from the trade war between the US and China, drawing a growing interest by multinational corporations to partly or fully relocate their contract manufacturing from China to Asean for cost as well as diversification reasons.

We note that SKP Resources has also been actively engaging with existing and prospective customers, mainly for box build assembly services. Our view is the group’s bids for new contract awards would be facilitated by its ample capacity — the latest plant JB Site 2, having enlarged overall capacity by 90%, is only 50% occupied; and its capability as a full-fledged electronics manufacturing services provider — with the said maiden PCBA services successfully commissioned.

Our FY20 and FY21 earnings estimates are adjusted by -1.7% and -2.7% respectively to RM133.8 million and RM165.5 million after revising our capex assumptions higher to RM40 million from RM20 million per annum previously. Upon rolling forward our base-year valuation to calendar year 2020, we valued SKP Resources at a higher TP of RM1.65 from RM1.35 a share previously, pegged at an unchanged price-earnings multiple of 13 times, closely in line with the stock’s five-year mean. We believe the stock’s valuations would be supported by it being a beneficiary of the said trade war. Key risks include lower-than-expected demand and failure to secure new businesses. — TA Securities, April 15