1Q20 NP missed our/consensus estimates, at 16%/14% of full-year forecasts due to slower uptake for its conventional electrical appliances. The absence of dividends was expected. Trim FY20-21E NP by 4% after reducing sales assumptions, also by 4%. Maintain MARKET PERFORM with a lower Target Price of RM1.15.

1Q20 missed expectations. 1Q20 Net Profit (NP) of RM18.5m (-10% QoQ; -29% YoY) missed expectations, making up 16%/14% of our/consensus estimates. The negative deviation is due to: (i) slower uptake for its conventional electrical appliances due to its key customer shifting to evolutionary model. Absence of dividend was as expected.

Results highlight. YoY, 3M20 NP fell (-29%) to RM18.5m, alongside (i) a decline in revenue (-16%) on lower contributions from its conventional electrical appliances due to a key customer’s shift to evolutionary model, and (ii) higher staff cost incurred to prepare for new products, which eroded EBIT margin (-1.5ppt) to 6.0%. QoQ, despite a slight increase (+2%) in revenue, 1Q20 NP declined (-10%) mainly attributed to: (i) higher effective tax rate (+6.4ppt) of 23.0%, and (ii) lower interest income.

PCBA line a silver lining. As we understand, the group’s first PCBA line has commenced in April, while we believe additional PCBA lines could begin in Sep and Nov 2019. The PCBA lines are expected to enhance net margins by up to 0.5ppt, although the effect is more likely to be felt in FY21 due to initial inefficiency. Having said that, we believe the commencement of the group’s PCBA line could pave the way for more contracts given the key customer’s emphasis for its contract manufacturers to be vertically integrated.

Trim FY20-21E NP by 4% to RM112.5-132.4m as we reduced FY20- 21E sales assumptions, also by 4%.

Maintain MARKET PERFORM with a lower Target Price of RM1.15 (previously RM1.20) based on an unchanged FY20 PER of 13.0x (vs. peers’ average of 13x). Note that among its closest peers, SKPRES pays the highest quantum of dividend (50% payout) translating into decent FY20-21E dividend yield of 4.1-4.8%.

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

Source: Kenanga Research - 30 Aug 2019