SKP outshined its competition as 2QFY22 NP jumped 24% QoQ to RM40.1m despite being limited to 60% workforce. This brings 1HFY22 CNP to RM72.6m (+34% YoY) which came in within expectation, representing 45%/46% of our/consensus full-year forecasts. The stronger QoQ performance and margin improvement were attributable to higher demand for its PCBA by external parties. With the availability of a full workforce to take advantage of the yearend festive sale, SKP is poised for a stronger 2H ahead. Maintain OUTPERFORM and Target Price of RM2.60.

Within expectations. 2QFY22 NP of RM40.1m (+24% QoQ; -9% YoY) came in within expectation, bringing 1HFY22 CNP to RM72.6m (+34% YoY), representing 45% and 46% of our and consensus full-year forecasts, respectively.

Results’ highlight. QoQ, while its peers in the EMS space saw significant decline in performance, SKP’s 2QFY22 NP jumped 24% higher to RM40.1m on an 8% increase in revenue to RM553.7m. The strong QoQ improvement despite being limited to 60% workforce during the FMCO period further illustrates the group’s capabilities in managing its operations as well as handling the labour shortage situation. As a result, its EBIT margin climbed 1.2ppt to 9.5% while NP margin rose 0.9ppt to 7.2%. YoY, 2QFY22 NP edged 9% lower while revenue fell 24% owing to the FMCO protocol whereas last year’s 2QFY21 was operating normally. On a cumulative basis, 1HFY22 revenue was slightly lower by 5% but NP leapt 34% on improved operational efficiencies.

Anticipating stronger 2H. Building upon its solid performance, SKP is prepared for a stronger 2H as it is now able to employ 100% of its workforce to take advantage of higher consumer demand during the year-end festive season. In addition to cost control and efficient management, the group’s margin improvement is also attributable to higher orders for its PCBA lines for in-house usage as well as external sale to other contract manufacturers which will continue in the subsequent quarters.

Increasing floor space. SKP will soon begin the construction of a new 4- storey c.750k sq ft plant (vs. previously planned 3-storey 600k sq ft) on a 6.4- acre land in Johor Bahru which will increase its total floor space by c.75%. The group has started the tender process for contractor selection and aims to have the facility completed within 12 months. Also, the group has recently purchased another 7.9-acre land nearby in anticipation of more orders from existing and new potential customers.

Maintain FY22E and FY23E NP at RM162.2m and RM182.3m, representing 22% and 12% growth, respectively. 

Maintain OUTPERFORM with an unchanged Target Price of RM2.60 based on 23x CY22E PER, representing +2SD to 3-year mean.

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

Source: Kenanga Research - 29 Nov 2021