1HFY20 NP missed our/consensus estimates, accounting for only 39%/40% of full-year forecasts due to higher start up cost incurred for new products. However, following quarter should benefit from better sales due to the year-end festive season. The absence of dividends was expected. Trim FY20E NP by 12% after taking into account the gestation period for its new lifestyle products. Maintain OUTPERFORM with an unchanged Target Price of RM1.35.

1HFY20 missed expectations. 1HFY20 Net Profit (NP) of RM43.4m (- 19.6% YoY) missed expectations, making up 39%/40% of our/consensus estimates. The disappointment was attributable to higher start-up cost incurred for new lifestyle products. Absence of dividend was as expected.

Results highlight. YoY, 1HFY20 revenue dipped 6.4% while NP fell 19.6% as demand for the conventional electrical appliances taper down. This is in tandem with the key customer’s shift to updated models. The larger quantum in NP decline can be explained by higher start-up cost incurred for new lifestyle products, which resulted in a 1.3ppt dip in EBIT margin to 6.1%. QoQ, NP soared 35% together with a 34% jump in revenue, owing to strong sales for the hair care and floor care (including a new variant) products.

Better outlook ahead can be expected after witnessing exceptional sales recorded during the 11.11 singles day sale. China in particular saw its key customer being listed as the top selling brand in e-commerce sites such as JD.com, Tmall and Suning. A continuity of positive sales should be supported by the year-end festive season as the group anticipates more demand for the updated variant floor care product and the hair care product. The group’s PCBA line has commenced in May 2019 and has been self sufficient for the production of the new variant floor care product. However, like all new production lines, there will be a learning curve before it achieves the targeted yield. Hence, bulk of the margin improvements are more likely to be felt in FY21E. Having said that, we are positive on the commencement of the group’s PCBA line, as will better equip the group for more contracts given the key customer’s emphasis for its contract manufacturers to be vertically integrated.

Trim FY20E NP by 12% to RM99.1m after taking into account the gestation period for its new lifestyle products and the PCBA line before it achieves optimal efficiency.

Maintain OUTPERFORM with an unchanged Target Price of RM1.35 based on an unchanged FY21E 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 3.3-4.3%.

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 - 2 Dec 2019