SKPRES’s 1HFY23 results met expectations. Its revenue rose 20.8% YoY on growing demand for all products, especially personal grooming products. Its core net profit grew at a slightly slower pace of 15.3% YoY but for a good reason, i.e. as the group incurred some start-up costs for a new household product that is advancing into the mass production stage. SKPRES expects demand to remain encouraging going into the year-end season. We maintain our forecasts, TP of RM2.10 and OUTPERFORM call.

Within expectations. 1HFY23 CNP of RM83.7m (+15.3% YoY) came in within expectations, representing 46% and 45% of our full-year forecast and the full-year consensus estimate, respectively.

Results highlight. YoY, 1HFY23 revenue rose 20.8% YoY, in line with the higher fulfilment of increasing demand received from its key customer. We learnt that the orders for its personal grooming product continued to grow and the group had to reprioritise its workforce to cater for the higher output demanded. 1HFY23 core net profit grew 15.3% YoY, a marginally slower pace compared to its revenue growth as the group incurred some start-up costs in 2QFY23 in anticipation of a new household product advancing into mass production in subsequent quarters.

Its customer orders remain encouraging going into the year-end season which will keep SKPRES busy. The group has completed the recruitment of its final batch of 250 workers which brings its current workforce to c.7,600 employees. Another 1,500 workers have been applied for and approved in preparation for the upcoming new 650k sq ft plant on a 6.4-acre land in Johor Bahru which will be completed by 1QCY23, increasing its total floor space by c.50% for new projects.

Forecasts. Maintained.

Investment thesis. We like SKPRES for: (i) being a direct proxy to a fast-growing premium brand for household products, (ii) having better bargaining power by being vertically integrated, and (iii) its ability to maintain margins with the pass-through mechanism in place to mitigate fluctuations in material costs.

We maintain our TP of RM2.10 based on 17x CY23F PER, at a slight premium to its peers’ average forward PER of 15x which is justified by SKP being the only company that has full exposure to the fast-growing premium brand. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) loss of orders from non-renewal of contracts by its key customer, (ii) labour shortage and rising labour cost, (iii) negative social activists’ reviews on treatment of migrant workers, and (iv) unfavourable currency movements.

Source: Kenanga Research - 1 Dec 2022