SKPRES’s 9MFY23 results disappointed with core net profit only growing 4.9% due to lingering start-up costs for two new products. The near-term outlook also appears dismal as its key customer has lowered its sales forecasts for existing products. We cut our FY23-24F net profit by 16-36% respectively, slash our TP by 43% to RM1.20 (from RM2.10) and downgrade our call to UNDERPERFORM from OUTPERFORM.

Below expectations. 9MFY23 core net profit of RM124.4m (+4.9% YoY) came in at only 69% and 70% of our full-year forecast and the full-year consensus estimate, respectively. We deem the results below expectation as we expect a weak 4Q owing to the softening demand from its key customer.

Results’ highlight. YoY, 9MFY23 revenue rose 16.7%, in line with an increase in orders for its household products as well as encouraging demand for its grooming products during the year-end festive period. However, core net profit lagged behind with only a modest 4.9% growth as the group continued to incur start-up costs for two new products that were awarded by its key customer. Note that the production lines and hiring of additional workforce for these two new products have been set up in 1QFY23 but the transition into mass production was delayed due to customer’s longer-than-expected sampling cycle.

Demand softening. Not helping, is the expected tapering of demand for its key customer’s products as it lowered sales forecasts as consumers globally are tightening belts, including spending on household products, amidst economic uncertainties. This will translate into softer quarters ahead with margins trending lower due to: (i) suboptimal utilisation of floor space, (ii) higher electricity cost which took effect in Jan 2023, and (iii) the depreciation of its new 650k sq ft plant on a 6.4-acre land in Johor Bahru which will be completed by 4QFY23.

Forecasts. We cut our FY23-24F net profit by 16-36%.

Investment thesis. We like SKPRES for: (i) being a direct proxy to a fast-growing premium household products brand, (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. However, its single customer concentration leaves it vulnerable should the customer hit a soft patch.

We slash our TP to RM1.20 (from RM2.10) based on a reduced 15x FY24F PER (previously 17x) after placing the PER valuation in line with its peers rather than at a premium as before. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Downgrade to UNDERPERFORM from OUTPERFORM.

Risks to our call include: (i) new products hitting mass production stage faster-than-expected, (ii) a strong recovery in order flows, and (iii) onboarding of new customers.

Source: Kenanga Research - 27 Feb 2023