SKP Resources (SKP) recorded improved earnings for a second straight quarter, with 1HFY25 core profit of RM66.6m (+29.3% YoY). Core profit margin was also better at 5.8% (vs 1HFY24: 5.4%), underpinned by i) improved capacity utilisation, ii) cost optimisation initiatives and iii) lesser outsourced jobs to subcontractors. The results made up 54.2% and 54.6% of our and consensus full-year expectations, respectively. We expect the positive earnings momentum to continue in the subsequent quarters on favourable year-end seasonality. 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. No dividend was declared for the quarter.

• 2QFY25 performance. During the quarter, revenue rose 22.2% YoY to RM635.3m, led by higher throughput and a more favourable product mix from a key customer. Meanwhile, core profit increased by 23.6% YoY to RM36.7m. With management continuing to undertake cost optimization initiatives while also enhancing operational efficiencies, net profit margin has improved to 5.8% (2QFY24: 5.7%), closer to internal targets of ~6%, as greater economies of scale were also attained on account of higher production levels.
• Diversifying customer base. Mindful of its high customer concentration risk, management is in the midst of securing two new potential customers with plans to begin production towards end of the year. The production lines for the two new customers from the US and Europe, have started to take off since last month. Management guided sales value of RM100m from the US customer in the first year and the potential of the value doubling in the second year. 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. As of now, the group has nine household product models under its portfolio. Talks are also ongoing with several potential new customers, with the Group confident of onboarding at least one by the end of this year.

Source: PublicInvest Research - 26 Nov 2024