FY16 Net Profit (NP) of RM82.1m came in within expectations which made up 98%/99% of our/consensus estimates. No dividend was declared for the quarter as expected. We continue to favour SKP Resources given its clearer earnings visibility (with robust 2-year NP CAGR of 40% even after registering a robust 94% YoY NP growth in FY16) as well as its cost passthrough mechanism which makes it less sensitive to currency fluctuation. Beyond that, we also do not discount the possibility of more contracts being awarded for revolutionary products which are in line with Dyson’s vision. Post-model updates, we marginally trimmed our FY17E earnings by 2% for house-keeping purposes, while we also introduce our FY18E earnings (+5% YoY). Maintain OUPERFORM with a lower TP of RM1.72 from RM1.76 based on an unchanged targeted 14.0x FY17E PER.

Within expectations. The group reported 4Q16 net profit (NP) of RM21.6m (- 11% QoQ; +86% YoY), bringing FY16 NP to RM82.1m (+94%) which made up 98%/99% of our/the consensus’ FY16 NP estimates. As expected, no dividend was declared under the quarter reviewed. Note that the group usually pays its final dividend by end of July/early August; with dividend payout of not less than 50% as per its dividend policy. We are forecasting the group to pay a NDPS of 3.5 sen for FY16.

YoY, FY16 revenue spearheaded to RM1051.0m (+70%) thanks to the consolidation of its subsidiary Tecnic since 1Q16. Stripping out the contribution of Tecnic, FY16 revenue still grew strongly by 31%, mainly driven by the contribution from the first tranche of cordless vacuum cleaner contracts secured in May 2015 (equiv. to RM400m). Meanwhile, EBIT came in at a higher growth quantum of 93%, with margin inching up to 10.1% (+1.2ppts) as a result of higher operational efficiency.

QoQ, 4Q16 revenue decreased by 26% on seasonality weakness where orders are typically slower, aggravated by shorter working months. Note that there was also an absence of RM18.4m revenue in the quarter (where the group previously undertaken this component costings and bill it through passthrough mechanism back to Dyson) due to the zero-cost consignment basis by Dyson. If not for this, revenue would have only dropped by 20%. Meanwhile at the bottomline, PATAMI dropped by a narrower quantum of 11% helped by lower effective tax rate of 14% (with c.RM2m of special reinvestment allowances being utilised under the quarter reviewed).

Still on track. We believe the group’s long-term earnings prospects will remain resilient anchored by the two long-term contracts awarded by Dyson (sales contribution of RM1b/year; on cordless vacuum cleaners) which will eventually support the robust 2-year NP CAGR of 40%, even after registering 94% growth YoY in FY16. Beyond that, we do not discount the possibility of more contracts being awarded for revolutionary products (which are in line with Dyson’s vision) given its solid reputation in the industry with world-class manufacturing capability. Note that there is ample free capacity (of 70%) to take in more contracts.

Post-results, we marginally trimmed our FY17E NP by 2% for house-keeping purposes. Meanwhile, we also introduced our FY18E NP (+5%). Note that we have also made adjustments to our FY17E revenue by lowering c.RM200m to account for the zero-cost consignment of components for Dyson.

Maintain OUTPERFORM with a marginally lower TP of RM1.72 (from RM1.76) post model updates. This is based on a targeted 14.0x FY17E PER, a valuation which is 20% higher from its EMS industry peers. The premium valuation is justified, backed by its robust 2-year NP CAGR of 40% as well as the higher than industry’s (yet sustainable) margins backed by its cost passthrough mechanism.

Source: Kenanga Research - 31 May 2016