- A turnaround. SKP faced a challenging FY14 where earnings took a dent due to weak orders from its main customer, Dyson. The Group also faced margin compression from the implementation of minimum wage policy as well as the electricity tariff hike. Despite these challenges, the Group has made a comeback in 4Q14, which was underpinned by stronger order books from its existing customer as well as increased production capacity to boost its earnings. The group recorded strong earnings jump in 4Q14 where its net profit surged by 17% YoY to RM8.2m, thanks to higher order books recorded for the quarter. Meanwhile, we also understand that its production utilization rate has returned to a comfortable 75% level from its low 60% in FY14.

- Factory expansion in progress. The Group is currently completing the construction of a new factory on a 2ha land which was previously acquired in Senai, Johor for RM6.8m. The Group had allocated a capex of RM38.0m for this expansion plan which will boost its production capacity to 75% onto its current threshold over the next three years. The new plant is expected to be ready in October 2014 with an aim to achieve full-scale operation by FY17. This implies an evenly distributed 25% additional new capacity added on-stream for the next three years.

- New products to boost earnings. Being one of the key OEM manufacturers for Dyson over the past 5 years, SKP has secured another contract from Dyson recently to manufacture two new product lines (vacuum cleaner and next generation fans). This ensured that SKP will have a stronger order book to provide earnings visibility for the next few years. The new products would be a next generation product that will be able to fetch higher margins and contribute to the Group’s earnings. We understand that the majority of the new plant capacity will be catered for these two new products.

- A huge cash pile in the coffers. SKP is currently sitting on a net cash of RM93.1m, translating into 10.3 sen/share or 21.6% of the Group’s market capitalisation. Besides, SKP also has a sizeable retained earnings base of RM130.4m (vs. market cap of RM432.0m), suggesting that the group has a strong capability in financing its future capex internally. We believe, the strong balance sheet will continue to lead the group to sail through any unfavourable operational environment in the future.

- An attractive 5-6% dividend yield. SKP has been consistently rewarding its shareholders by declaring 0.9-2.3 sen annual DPS since FY12, which is in-line with its dividend payout policy of 50%, which translated into an average of 3.0%-5.0% dividend yield. Moving forward, in view of its strong earnings growth and healthy cash-flow, we believe the group will continue to maintain its dividend payout policy, which translates into an attractive dividend yield of 5.0%-6.0% for FY15-FY16, respectively.

- Trading Buy with a TP of RM0.57, based on a targeted 12x FY15 PER, in line with FBMSC FY15 PER of 12.5x as well as the Group’s 3-year average PER of 12.3x.

Source: Kenanga