FY19 NP came within our/consensus estimates, accounting for 96%/95% of full-year forecasts. The absence of dividends was expected. Trim FY20E NP by 4% to RM126.5m after reducing sales assumptions by 5%, while introducing FY21E NP of RM143.2m. Maintain OUTPERFORM with a lower Target Price of RM1.40 based on FY20E PER of 14.0x.

FY19 within expectations. FY19 Net Profit (NP) of RM97.0m (-14% QoQ, -24% YoY), is within our/consensus estimates. Absence of dividend was as expected. Note that the group usually pays its final dividend by end of July/early August, with dividend pay-out of no less than 50% as per its dividend policy. We are expecting a DPS of 4.0 sen for FY19 based on a pay-out ratio of 51%.

Slower uptake. YoY, FY19 NP fell (-24%) to RM97.0m as revenue declined (-21%) from slower uptake in conventional electrical appliances following the shift in its main customer to the evolutionary model, exacerbated by a higher effective tax rate (ETR) of 22.6% (+3.7ppt) as certain tax incentives expired. QoQ, 4Q19 revenue fell (- 11%) which we believe was mainly due to slower ramp-up in lifestyle products and other customers. Despite lower operational efficiency, which caused EBIT margin compression (-1.3ppt) to 6.0%, NP margin only compressed (by 0.2ppt) to 5.6%, as ETR decreased (-9.1ppt) to 16.6% (due to overprovision).

PCBA has commenced. The group’s first PCBA line has commenced in April, while additional lines for newer products are slated to begin in July and Sept 2019. This also paves the way for more contracts given the key customer’s emphasis for its contract manufacturers to be vertically integrated. Meanwhile, the group has 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. With its PCBA up and running, SKPRES should no longer trade as a laggard to its peers with similar capabilities.

Trim FY20E NP by 4% to RM126.5m to be on the conservative side as we trimmed our bullish sales assumptions slightly by 5%. We also introduce FY21E NP of RM143.2m.

Maintain OUTPERFORM with a lower Target Price of RM1.40 (from RM1.45) based on an unchanged FY20E PER of 14.0x. At current price, SKPRES is trading at a forward PER of 12.9x vs. its 1-year mean of 14.0x which we believe is unjustified given its robust expected earnings growth (alongside decent dividend yield of 4.0%).

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 - 3 Jun 2019