SKPRES’s FY23 results met our expectation but disappointed the market. 4QFY23 net profit more than halved QoQ due to lower sales while operating cost remained elevated on an expanded workforce. Its outlook is clouded by consumers globally cutting back on spending on household products. We cut our FY24F net profit by 20%, reduce our TP by 21% to RM0.95 (from RM1.20) and maintain our UNDERPERFORM call.

Within Expectations. FY23 net profit of RM144.5m (-14.1% YoY) met our expectation but fell short of the consensus estimate by 7%.

Results’ highlight. YoY, FY23 revenue grew 9%, driven by robust loading volume from its customers for household products coupled with stable demand for its grooming products. However, net profit dipped 14% due to under-utilisation of its expanded workforce in 4QFY23 in anticipation of higher orders that failed to materialise.

QoQ, 4QFY23 revenue fell 32% while its net profit more than halved. In addition to the seasonally softer 4Q due to lower number of working days, it also felt the full brunt of the higher tariffs.

Outlook. SKPRES’s prospects are subdued with slowing consumer spending and hence demand for household products amidst the rising interest rate environment. Not helping either is its expanded workforce that will exert pressures on margins. To mitigate the situation, SKPRES is actively pursuing new opportunities from players who intend to relocate to Malaysia pursuant to their China+1 strategy. However, we understand that discussions with prospective clients are still at preliminary stages, and hence will not translate to the bottom line anytime soon. Typically, it takes 6-12 months from customer acquisition to mass production.

Forecasts. We cut our FY24F earnings forecast by 20% and introduce our FY25F numbers.

Consequently, we cut TP by 21% to RM0.95 (from RM1.20) based on an unchanged 15x FY24F PER, in line with its peers’ forward mean. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. We are cautious on SKPRES as its prospects for new orders are dim with consumer cutting back on spending on household products amidst high inflation and economic uncertainties. However, we acknowledge that: (i) it is a direct proxy to a fast-growing premium household products brand, (ii) it has better bargaining power vs. its peers as it is vertically integrated, and (iii) it has the ability to maintain margins with the pass-through mechanism in place to mitigate fluctuations in material costs. Maintain UNDERPERFORM.

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 - 31 May 2023