WHAT’S NEW

• SKP Resources’ (SKP) 4QFY18 results were within our expectations, with FY18 core net profit of RM125.6m accounting for 97% of our full-year forecast. We arrive at FY18 core net profit after excluding RM1.4m in unrealised forex gains (FY17: RM4.2m unrealised forex gains). We note that at the PBT level, FY18 PBT missed our expectation by making up only 92% of our PBT forecast, but due to the lower effective tax rate at 21.7% for FY18 (FY17: 25.4%), FY18 bottom-line was further lifted +26.8% yoy to meet our earnings expectation.

• Although 4QFY18 sales declined 20.4% yoy, gross profit rose 11.2% yoy, driven by a favourable sales mix and better productivity. However, core EBIT declined 28.8% yoy on higher overhead costs. Due to a much lower effective tax rate of 12.8% (4QFY17: 28.4%) on tax incentives, core net profit consequently shed a lower quantum of 11.8% yoy. We note that the yoy decline in sales may be due to: a) phasing out of old models, and b) 4QFY17 was a high base as the products were only recently launched in the market.

• On a qoq basis, 4QFY18 core net profit declined 12.6% qoq in tandem with a 10% decline in top-line. The qoq decline in top-line is attributed to phasing out of old models.

• VI will enable SKP to be better positioned for contract wins from key customer. In Apr 17, SKP incorporated a 75%-owned subsidiary (the remaining stake owned by a foreign partner) which manufactures printed circuit boards (PCB) and battery packs in a bid to acquire more jobs from its key customer. SKP expects to commence the manufacture of PCB in Aug 18 in its existing plant in Johor Bahru. We gather that suppliers awarded the vertically integration (VI) status stand better chances of securing more orders from the key customer as the suppliers will have more control over cost and quality in the entire process, thus reducing risks of cost hikes, disruption to raw material supply and quality issues.

• Large contract wins will be a rerating catalyst to SKP. Given that SKP still has about 50% floor space capacity at its Johor Bahru plant, we believe it is in a sweet spot to take up more jobs from its key customer.

EARNINGS REVISION

• We believe contract flows for SKP will be tepid for FY19 as the company will only commence the manufacture of PCB in Aug 18, hence we cut our FY19 earnings forecast by 5.6% to RM141m. However, we keep our FY20 earnings forecast unchanged at RM171m and take the opportunity to introduce our FY21 earnings forecast of RM190m.

RECOMMENDATION

• Maintain HOLD and target price of RM1.60, based on 12x 2019F PE. We believe most of the positive news has been priced in at this juncture. Key re-rating catalyst will be big contract wins from its key customer or new customers. Entry price is RM1.50.

• Decent yields. Based on SKP’s 50% dividend payout policy, the stock offers decent yields of 3.7-5.0% for FY19-21F.

Source: UOB Kay Hian Research - 31 May 2018