We came away from a management meeting feeling more POSITIVE on SKPRES’ medium-term prospects. Main drivers are: (i) new contracts from its key customer, (ii) margin enhancement from the commencement of its long-awaited PCBA line, and (iii) more appealing risk-reward ratio. Reduced FY19E earnings but unperturbed as we anticipate a strong FY20. Upgrade to OUTPERFORM (from MARKET PERFORM) with a higher Target Price of RM1.45 (previously RM1.25).

Orders to recover in FY20. While 9M19 saw a slower uptake in its electrical appliances following the shift of its main customer to newer models, we expect FY20 to see a recovery in its box-built orders, driven by: (i) new lifestyle products from its key customer, (ii) new model variant for one of its conventional electrical appliance, and (iii) resilient orders from its personal care products (c.50% coming from Asia). All in all, these should be able to comfortably anchor our FY20E top-line forecast of RM2.2b. On the US- China trade war front, we understand that SKPRES has received multiple enquiries for its PCBA and box-built capabilities. However, the group desires to remain selective as it focuses on existing swarming orders from its key customer.

Margin enhancement from long-awaited PCBA line. SKPRES’ first PCBA line is slated to commence in Apr 2019, while additional lines for newer products are expected to begin in Sept 2019. The new PCBA capability also paves the way for more contracts given the key customer’s emphasis for its contract manufacturers to be vertically integrated. Additionally, we estimate that this would improve margins by c.0.5ppt. Currently, the group has already identified a 2.2-acre land and placed orders for new plastic injection machines in anticipation of new products, while its Johor plant still has c.50% of floor space to cater for new contracts.

Potential PER catch-up. Currently, SKPRES is trading as a laggard with FY20E PER of only 12.5x compared to ATAIMS’ 15x PER. We believe the discrepancy could be due to the former lacking PCBA capabilities previously. Now with SKPRES’ new PCBA capability, we believe current valuations are unjustified and thus, should re-rate closer to its peers with PCBA capabilities. Note that among its closest peers, SKPRES also pays the highest quantum of dividend (50% payout) translating into decent FY19-20E dividend yield of 3.2-4.1%. All-in, we see more appealing risk-to-reward ratio from here.

Reduce FY19E earnings. Post meeting, we reduced FY19E NP by 8% on temporary slower orders from existing conventional electrical appliances, while increasing FY20E NP by 1% for house-keeping. However, we are unperturbed by our FY19E earnings reduction as we look forward to a strong FY20.

Upgrade to OUTPERFORM (from MARKET PERFORM) with a higher Target Price of RM1.45, (previously RM1.25) based on a higher valuation of 14.0x FY20 PER, close to its 3-year average. Besides a decent upside of 10%, decent FY19-20E dividend yields of 3.2-4.1% should appeal to investors. Risks to our call include: (i) lower-than-expected orders from its customers, (ii) higher input costs, and (iii) single customer concentration risk.

Source: Kenanga Research - 18 Mar 2019