SKPRES’s 1QFY24 results met our expectations but disappointed the market. Its 1QFY24 net profit plunged 42% YoY on weak orders as customers undertook inventory level optimisation. On a brighter note, it is already seeing a gradual pickup in orders. We maintain our forecasts and TP of RM0.95, but upgrade our call to MARKET PERFORM from UNDERPERFORM as value has emerged after the recent sell-off.

Within expectations. SKPRES’s 1QFY24 net profit of RM431.6m (- 41.9% YoY) was largely within our expectation at 22% of our full-year forecast but fell short of the consensus estimate at only 19% of the estimated full-year profit.

Results’ highlight. YoY, SKPRES’s 1QFY24 revenue decline of 22% was well guided by the group. The decline was attributable to a reduction in orders from its customers, who are optimising their inventory levels amidst the sluggish consumer market. Operating below its ideal capacity, the group experienced a more rapid 41.9% decline in net profit, leading to a contraction in net profit margin to 5.0% (vs. 6.7% in 1QFY23) due to the loss of economies of scale.

Outlook. We understand that the slowdown is not unique to SKPRES but is a reflection of the impact from broader economic challenges, particularly, the slowdown in China, hurting the demand for consumer household products. Nevertheless, it mentioned that orders have already hit rock bottom this quarter and it is already seeing a gradual pick-up (which is consistent with our assumption).

Forecasts. Maintained

We maintain our TP of RM0.95 based on an unchanged 15x FY24F PER, representing c.10% discount to 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 consumers cutting back 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. We also believe that downside is limited after the significant sell-off and therefore we upgrade our call from UNDERPERFORM to MARKET PERFORM.

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 - 28 Aug 2023