Kenanga Research & Investment

SKP Resources - A Bumpy Recovery, At Best

Publish date: Fri, 01 Dec 2023, 10:01 AM

SKPRES’s 1HFY24 results disappointed with its net profit declining 42% YoY as customers trim inventory levels. On a brighter note, its 2QFY24 revenue rose 21% QoQ, indicating green shoots of recovery but the path ahead could be bumpy. We trim our FY24-25F net profit forecasts by 10% and 9%, respectively, reduce our TP by 11% to RM0.85 (from RM0.95) but maintain our MARKET PERFORM call.

Below expectations. SKPRES’s 1HFY24 net profit of RM48.7m (- 41.9% YoY), accounted for 49% and 44% of our full-year forecast and the full-year consensus estimate respectively. However, we deem the results below expectations as we are expecting a weaker 2H.

Results’ highlight. YoY, SKPRES’s 1HFY24 revenue saw a 26% decline, which was already cautioned by the group in the previous quarter. The slowdown in revenue was in relation to customer’s strategies aimed at optimising inventory in response to a lacklustre consumer market. This naturally led to a sub-optimal utilisation rate resulting in the group recording a steeper 41.8% decline in net profit. Its net profit margin was compressed to 5.1% (vs. 6.5% in 1HFY23) due to the loss of economies of scale.

QoQ, the group saw improvement signs as 2QFY24 revenue climbed 21% on improved loading volume as utilisation rate trended higher to c.70% compared with c.60% in 1QFY24. As a result, 2QFY24 net profit grew 25% with slight margin recovery to 5.2% (vs. 5.0% in 1QFY24).

Cost control remains the focus. SKPRES is not spared the broader global economic challenges, hurting the demand for consumer household products. SKPRES is hopeful that its loading volume has bottomed out, bracing for a gradual recovery. However, the recovery path ahead may be bumpy, prompting it to step up cost control.

Forecasts. We cut our FY24-25F net profit forecasts by 10% and 9%, respectively.

Correspondingly, we lower our TP by 11% to RM 0.85 (from 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).

We like SKPRES as: (i) it is a good proxy to an innovative premium consumer electronics brand, (ii) it has an edge over its peers given its vertical integration, and (iii) it has been able to consistently pass on higher production cost to its customers. However, over the immediate term, it is not spared the lull in the global consumer electronics market amidst high inflation and economic uncertainties. Maintain 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 - 1 Dec 2023

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