SKPRES has resumed to 100% operational workforce since May to clear order backlogs and meet new orders as its key customer increases order forecast to pre-Covid 19 levels, and even asked for the company to operate on Sundays. The group’s pipeline is fully occupied with new household products coupled with steady demand for existing products. Even with the lockdown, there is strong demand for household products from online sales. With the in-house PCBA line qualified and running, we expect margins to recover in FY21 as the group will be self-sufficient then. Maintain FY21E earnings and OUTPERFORM call with an unchanged Target Price of RM1.56.

Expect a turnaround in FY21. We are pricing in a soft 4QFY20 owing to the movement control order (MCO) in Malaysia which had the electronic manufacturing services (EMS) players on full lock-down. SKP was working with approximately 10% workforce during MCO to cater for the food and beverage segment. With the restrictions lifted, we believe that FY21 will see a significant recovery as the group has resumed to 100% operational workforce since May to meet order backlogs. On top of that, order forecast from key customer have resumed to pre-Covid 19 levels. To cope with the increased orders, the group is even considering operating on Sundays.

New products in the pipeline. At present, the group’s pipeline is fully occupied with a slew of exciting household and hygiene products. One of the products that was recently launched last week boasts the same efficiency as its predecessor but at half the weight, which allows for better maneuvering and portability. This item will start selling in China and gradually be made available in other countries in South East Asia (SEA). For existing products, the group is still experiencing strong demand from the SEA region and the western market. This was possible thanks to strong online sales even during the lock-down period.

Margin improvement from PCBA line. We expect to see margin improvement in FY21 as the group’s PCBA line is expected to be well optimised for the production of the new variant household product. In the last few months, the group has also been qualified by its key customer to supply PCBA for a few other products that are currently in the group’s portfolio. We are positive on the group’s effort to be self-sufficient on PCBA, as it will better equip the group for more potential contracts given the key customer’s emphasis for its contract manufacturers to be vertically integrated.

Maintain FY21E NP but trim FY20E NP by 7% to RM89.5m as we factor in lower output for 4Q due to the MCO.

Maintain OUTPERFORM with an unchanged Target Price of RM1.56 based on an unchanged FY21 PER of 14.0x (in line with its 5-year mean).

Risks to our call include: (i) less aggressive expansion from its key customer which translates to lower-than-expected orders, (ii) higher-thanexpect start-up costs, (iii) higher-than-expected input costs, and (iv) single customer concentration risk.

Source: Kenanga Research - 15 Jun 2020