9M19 NP came broadly within our expectation but below consensus accounting for 70%/63% of estimates, respectively, owing to slower sales in conventional electrical appliances. Absence of dividends was expected. No changes to earnings estimate. Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged Target Price of RM1.25 based on FY20E PER of 12.0x.

Broadly within but below consensus. 3Q19 net profit (NP) of RM23.3m (-17% QoQ, -23% YoY), brought 9M19 NP to RM76.9m (- 22%) which made up 70%/63% of our/consensus full-year estimates. We deem 3Q19/9M19 results to be broadly within, in anticipation of a stronger 4Q to make up for the shortfall in 3Q19 as orders from key customers recover. No dividend was declared for the quarter under review, which was as expected.

Seasonally weaker quarter. YoY, 9M19 revenue fell 20% on normalization from the high base in 9M18, alongside a slower uptake in conventional electrical appliances following the shift of its main customer to evolutionary models. With lower operational efficiency, EBIT margin compressed to 7.4% (-0.4ppt), resulting in a further drop of 22% at its PATAMI level. QoQ, 3Q19 revenue declined 17% on seasonality as typically revenue peaks in 2Q and slows down in 3Q. While EBIT margin was stable at 7.3%, ETR increased from 23.5% to 25.6% (+2.1ppt) resulting in a marginal decline in NP margin from 5.9% to 5.8%.

PCBA on track to commence in March. We gathered that the group’s PCBA services are on track to commence in March which should allow the group to secure new contracts to mitigate the impact of softening revenue trend on new product focus from its main customer. Recall that the group still has c.50% of floor space to cater for new contracts while consolidating its Vertical Integration status (with PCBA + Battery pack capability) to improve the strike rate of clinching more contracts which we have not factored into our estimates.

No changes to earnings estimate. Post results, we make no changes to our FY19E and FY20E NPs of RM110.1m and RM131.1m, respectively.

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged Target Price of RM1.25 based on FY20E PER of 12.0x which represents a -1.0SD below its 3-year forward PER. Although the commencement of PCBA services remains a silver lining, we believe SKPRES is fairly valued at current price of RM1.31 (YTD up 27%). We may re-look our estimates upon more concrete signs of additional contracts for SKPRES.

Risks to our call include: (i) lower/higher-than-expected orders from its customers, (ii) higher/lower input costs, and (iii) single customer concentration risk.

Source: Kenanga Research - 27 Feb 2019