Strong production flow. A recent visit to SKP Resources (SKP)’s plant in Johor Bahru has reaffirmed our confidence on its outlook moving forward. The high international standard quality control coupled with robust production facility has proven its production capability, efficiency as well as competence to clients. These strong production attributes as well as its R&D capabilities helped to explain as to why Dyson, a leading worldwide designer and manufacturer of household equipment, opted to partner with SKP five years ago.

Factory expansion plan on track. SKP’s new plant (located in Senai, Johor), is on track to be completed by October 2014, which will allow the group to boost its current production capacity by another 75% by FY17. This implies an evenly distributed 25% additional new capacity coming on-stream for the next three years. Meanwhile, the group’s current production utilisation has improved to c.75% from c.60% as recorded in 2H14. To recap, SKP has acquired a 2ha land in Senai, Johor, for RM6.8m on March 2014 and had allocated a capex of RM38.0m for this expansion plan.

New production lines in the pipeline. The upcoming new plant (scheduled to be completed by October 2014) is targeted to cater for new orders from Dyson, which will introduce two new production ranges (vacuum cleaner and next-generation fans) in coming months. While management refused to elaborate more, we understand that Dyson as well as SKP are confident on the new products due to their innovative and unique features.

New products to boost earnings. The new products are expected to fetch higher margins in view of better product efficiency. Note that management has a cost pass-through mechanism with its clients, which allows the group to mitigate currency and raw materials risks. Management believes with these new production lines coming onstream coupled with solid order books from other key clients, its earnings are expected to surge moving forward. We expect SKP’s earnings to jump 41.5% and 32.6% in FY15 and FY16 respectively.

Near-term catalyst priced in. SKP’s share price has performed tremendously well and surged 22.4% since our last trading buy call at RM0.49 on 26-Jun. While we believe that the Group’s outlook is positive, its near-term catalyst has been largely priced in, in our view, judging from its recent strong share price performance since May. Meanwhile, SKP is currently trading at a forward PER of 12.9x, which is in line with FBM Small Cap forward PER of 12.7x. In view of the limited upside from here, we advocate investors to take profit for now and revisit the stock when more attractive valuations emerge.

Source: Kenanga