SKPRES has finally unveiled the details on the long-awaited new orders for Dyson Supersonic Hair Dryer. While this comes at the expense of the discontinuation of the first order of Dyson’s V6 cordless vacuum cleaners (V6) due to reallocation of labour resources, we are net POSITIVE on this trade-off given the overhang being removed concerning the orders fluidity for V6 as well as the net revenue increment of RM100m. We adjusted our FY17E/FY18E NP by -14%/+4% and trim our TP from RM1.72 to RM1.48. Maintain OUTPERFORM.

New hairdryer orders secured at the expense of first model cordless vacuum cleaners. According to Bursa announcement, SKPRES has clinched a four-year contract, with an estimated total value of RM500m/annum from Dyson. From our discussion with management, we gather that these orders are for the manufacturing of Dyson’s new revolutionary product, Dyson Supersonic hairdryer, which recently saw overwhelming response during the product launching in Japan and UK. However, it was also stated that the new order comes together with the discontinuation of the manufacturing of first model cordless vacuum cleaners, V6, which was previously announced in May 2015. Recall that this contract value is estimated to be RM400m/year for over a five-year duration.

Utilitarian move taken for the best interest of its aggressive business expansion. While we were negatively surprised upon first glance at the announcement, we took comfort from management’s explanation that it is for the optimisation of labour resources. Through our understanding from management, the group has been plagued with the issue of limited resources due to the recent policy changes of foreign workers hiring in Malaysia. While the labour issue has now been partly resolved, this comes at the cost of shortterm cost pressures in 1H17 as well as to reallocate resources from the manufacturing of the first V6 model of cordless vacuum cleaners.

Net positive impact to the group. On our take, we are net POSITIVE on the announcement. We understand that the manufacturing of Supersonic Hairdryer end products are only exclusively awarded to SKPRES for now and this reaffirmed Dyson’s confidence in SKPRES’s capability, which will boost its chances of securing more contracts in the medium-term for other products amid Dyson’s aggressive expansion plans. Besides, the discontinuation of the manufacturing of V6 cordless vacuum cleaners could be a blessing in disguise to the group as our channel checks revealed that there is a total of three manufacturers for this model; of which has removed the risks of orders fluidity (by doing V6 model) by not competing with these players. Meanwhile, management has also reaffirmed that the orders of second model V8 cordless vacuum cleaners (which carries longer battery lives as well as more suction power than V6) shall remain unchanged. Note that SKPRES is the sole manufacturer of the V8 cordless vacuum cleaners.

Maintain OUTPERFORM, with a lower TP of RM1.48. Notably, the group has also proposed a final single-tier NDPS of 3.50 sen for FY16, which is subject to shareholders' approval at the forthcoming 16th AGM, which is spot on to our previously forecasted FY16 DPS. All in, after accounting for the net incremental revenue from new orders (full contribution will only be seen in FY18 due to gradual ramp-up starting from 2QFY17) as well as the temporary hiccup from the group’s labour issue, we reduced our FY17E NP by 14%. Meanwhile, our FY18E NP has been increased by 4% to account for the fullyear contribution from new Dyson Supersonic Hairdryer. As a result, our TP has been reduced from RM1.72 to RM1.48, still based on a targeted 14x FY17E PER. In terms of valuation, it is still trading at an undemanding 9.2x FY18E PER, all against its 2-year NP CAGR of 43% coupled with higher than industry margins backed by its cost pass-through mechanism. A decent dividend yield of 5.4% is also appealing to investors seeking refuge in defensive investment.

Risks to our call include: (i) loss of orders from its customers, (ii) higher input costs, and (iii) weaker-than-expected consumer sentiment.

Source: Kenanga Research - 18 Jul 2016