The Group saw a better 2QFY22 despite ongoing disruptions from the FMCO during the quarter. Net profit of RM40.1m (-9.0% YoY, +23.6% QoQ) is commendable, contributing to a cumulative RM72.6m (+54.1% YoY) for 1HFY22. Making up 46% of our and consensus full-year numbers, we continue to see this as broadly in line with expectations as the subsequent quarters will see the earnings gap narrow due to the commencement of a new production line for a key customer. We trim FY22 estimates by 6.2% however to account for Cukai Makmur though we continue to see scope for earnings upside in light of the Group‟s capital expenditure plans and further benefits from its vertical integration initiatives. Recent developments with regard to a key competitor losing its key (and common) customer may also see potential spillovers to SKP, capacity availability notwithstanding. We are excited by this prospect, and affirm our Outperform call on SKP with an unchanged target price of RM2.65.

• 2QFY22 performance. Revenue of RM553.7m (-23.8% YoY, +7.5% QoQ), though sequentially stronger, reflects the Group‟s operations at 60% manpower capacity though an improved net margin of 7.2% (1Q: 6.3%) during the quarter is suggestive of the negative effects being mitigated by product realignments. With the Group now back running at 100% manpower capacity, coupled with the expected commencement of a new product line towards end-FY22, earnings in the coming quarters are expected to be notably stronger.

• Prospects remain bright, with the Group continuing to spend on its capacity expansion (the Group has recently purchased a 6.4-acre plot of land for RM14.2m, and is eyeing another 7.9-acre plot for RM19.9m), and which has invariably led to the securing of new order flows. This has not accounted for potential spillovers from a key competitor having lost its key (and common) customer. The Group will also continue to expand its Printed Circuit Board Assembly (PCBA), injection moulding and engineering capabilities to cater to a widened product portfolio.

Source: PublicInvest Research - 29 Nov 2021