SKP Resources (SKP) recorded a sequentially stronger quarter, with a 1QFY25 net profit of RM28.3m (+31.3% YoY, +20.9% QoQ) coming on the back of an improved RM505m (+17.1% YoY, +11.6% QoQ) revenue. Net profit margin was also better at 5.6% (1QFY24: 5.0%) as greater economies of scale was attained on higher production levels. Coming in line with our and consensus estimates at 23% of full-year numbers, we remain encouraged by headway being made by the Group in expanding its customer base while also sustaining and growing order flows from its existing key customers. Looser monetary conditions in the months ahead should aid the recovery in consumption spending, benefiting the Group positively. Our earnings estimates are kept unchanged. We remain affirmed of SKP’s long-term growth prospects and maintain our Outperform call with a PE-derived target price of RM1.30 based on 15x multiple to CY25 EPS.

• 1QFY25 performance. The current quarter’s healthier revenue of RM505.5m (+17.1% YoY, +11.6% QoQ) reinforces the view that recovery in demand is on track. With global central banks on paths toward monetary loosening in the months ahead, we expect to see stronger recoveries in consumer spending, directly benefitting the Group over the medium to longer term. With management continuing to undertake cost optimization initiatives while also enhancing operational efficiencies, net profit margin has improved to 5.6% (1QFY24: 5.0%), closer to internal targets of ~6%, as greater economies of scale are also attained on account of higher production levels.
• New customers. Management has indicated that they are on active lookouts to broaden the customer base to reduce credit concentration risk, an effort which has recently yielded a new American-based and Europeanbased customer. It is estimated that cumulative order flows (on annual basis) from these 2 new customers amount to about 6%-7% of current revenue. The Group continues to stand ready to receive significantly stronger order flows with its immediately-available capacity, manpower and delivery track record. We remain conservative in our earnings assumptions, only imputing marginal growth in the medium term.

Source: PublicInvest Research - 27 Aug 2024