We had a recent meeting with management, coming away with reinforced belief of the company’s growth prospects and value. While FY16’s net profit expectation will be lowered by 13.5% to reflect an expectedly softer 4QFY16 partly due to the festive period and a slightly slower start to the calendar year, management assures that operations are on a “full-steam ahead” mode and is already seeing a pick-up in the numbers. Of greater encouragement is the fact that the company is not resting on its laurels and basking in the glow of the massive orders secured from Dyson in 2015, as new opportunities continue to be sought. Our Outperform call is retained with an unchanged PE-derived target price of RM1.71 premised on a 15x PE multiple to FY17 EPS, the higher multiple justified given its robust growth levels in the coming few financial years. SKP remains one of our preferred picks for 2016.

• On current jobs - Dyson remains a major contributor to the Group’s earnings with a 55% to 60% share of overall numbers. Production on the RM400m contract secured in May 2015 was rolled out in December last year while works on the RM600m contract is anticipated to kick-off end-March/early-April. Non-Dyson related products are still seeing c.6%-8% growth, making up the remaining 40% to 45% of overall numbers.
• On potential new jobs - works are already underway on another product. Though management was non-committal on expected contributions, but understandably so, fully-commercialized production could be the next re-rating catalyst for the stock, though only in 2H CY2017. The Group has sufficient unused capacity, and most importantly at low holding costs, which could see earnings double when eventually fully-utilized for its entire product range.
• USD fluctuations – Effective February 1 this year, certain USD-denominated components for Dyson’s products will be taken on a zero-cost consignment basis, improving efficiency in the management of its resources, especially its cash flows. While the resulting effect will be an estimated lowering of its forward revenue by c.RM200m owing to an elimination of the previously-used pass-through mechanism, bottom-line numbers are maintained which implies an improvement in margins. Our earnings estimates for FY17 and FY18 are tweaked higher by c.2% on housekeeping-related changes.
• Recent share price weakness provides fresh opportunities for late-comers into the stock to participate in its strong growth anticipated over the next few financial years. We continue to see value at current levels despite the share price having already appreciated sharply in 2015.

Source: PublicInvest Research - 15 Mar 2016