SKP Resources Bhd
(Aug 30, RM1.09)
Maintain market perform with a lower target price (TP) of RM1.15: SKP Resources Bhd’s first quarter of financial year 2020 (1QFY20) net profit (NP) missed our/consensus estimates, at 16%/14% of full-year forecasts due to slower uptake for its conventional electrical appliances. We also trim our FY20 to FY21 NP forecasts  by 4% after reducing sales assumptions, also by 4%.

Year-on-year, three months in 2020 NP fell (-29%) to RM18.5 million, alongside: i) a decline in revenue (-16%) on lower contributions from its conventional electrical appliances due to a key customer’s shift to evolutionary model; and ii) higher staff cost incurred to prepare for new products, which eroded earnings before interest and tax margin (-1.5 percentage points [ppts]) to 6%.

Quarter-on-quarter, despite a slight increase (+2%) in revenue, 1QFY20 NP declined (-10%) mainly attributed to higher effective tax rate (+6.4ppts) of 23% and lower interest income.

Printed circuit board assembly (PCBA) line is a silver lining. As we understand, the group’s first PCBA line commenced in April, while we believe additional PCBA lines could begin in September and November. The PCBA lines are expected to enhance net margins by up to 0.5ppt, although the effect is more likely to be felt in FY21 due to initial inefficiency.

Having said that, we believe the commencement of the group’s PCBA line could pave the way for more contracts given the key customer’s emphasis on its contract manufacturers being vertically integrated.

We maintain “market perform” with a lower TP of RM1.15 based on an unchanged forecast FY20 price-earnings ratio of 13 times. Note that among its closest peers, SKP Resources Bhd pays the highest quantum of dividend (50% payout), translating into decent FY20 to FY21 dividend yields of 4.1% to 4.8%.

Risks to our call include: i) higher/lower-than-expected orders from its customers; ii) higher/lower input costs; and iii) single customer concentration risk. — Kenanga Research, Aug 30