SKP Resources started off the new financial year on a relatively underwhelming note, with a net profit of RM25.8m (-22.5% YoY, -9.5% QoQ) reported for 1QFY19. While typically a weaker quarter seasonally, we still deem this as missing both our and consensus estimates at 16% and 17% of full-year numbers respectively, largely on account of slight overestimations in growth prospects. The Group saw another sequential drop in revenue (-7.8% QoQ), reflective of a reduction in orders of a particular product line from one of its key customers. While we don’t think this as a particularly worrisome trend as we see improvements in subsequent quarters coming from growth in other product segments, we are conservatively lowering our FY19 to FY21 net profit estimates by an average 17% as we cut growth assumptions. We still like SKP’s growth prospects regardless, but target price is lowered to RM1.45 (RM2.22 previously) in line with our earnings cut. Target multiples are also lowered to 12x (15x previously) CY19 EPS as corresponding forward CAGR is reduced accordingly. Our Outperform call is retained however.
1QFY19 performance. Revenue of RM430.5m (-18.0% YoY, -7.8% QoQ) declined largely due to the reduction in orders of a particular product line from one of its key customers, though somewhat anticipated. This was however exacerbated by weakness in certain other clients’ orders, leading to the growth shortfalls. The Group’s near-term prospects continue to be underpinned by the two key contracts it secured in late- 2015 and mid-2016 worth an estimated RM1.1bn (cumulative) annually, running an average of 4 to 5 years. Net profit margin of 6% is in line with expectations, with fluctuations minimized through a 100% cost pass through arrangement with its key customers.
Current developments. The Group’s Printed Circuit Board Assembly (PCBA) business is pending qualification by its major customers, with more significant contributions in the coming financial year as it steps up on bidding for certain contracts. We gather the Group has also started on sub-assemblies of a certain product for a peer as part of the latter’s entire value chain, keeping lines active and capital sufficiently employed despite it being lower margin in nature.
A suggested pick in the manufacturing sector for its growth attributes, and strong financial position. Further re-rating catalysts include i) securing of new contracts given its readily-available capacity, ii) venturing into new production and iii) expansion of client base.
Source: PublicInvest Research - 27 Aug 2018