SKPRES's 1HFY25 results met expectations. The Group expects continued growth in FY25 and FY26, driven by increased orders and operational efficiency. The impact of the new minimum wage hike is expected to be minimal due to the cost pass-through mechanism. Our FY25-26F earnings remain unchanged, as well as target price of RM1.35 based on a 16x FY26F PER. We also maintain our OUTPERFORM rating.

SKPRES's 1HFY25 net profit of RM63m met expectations, representing 54% of our forecast and 51% of the street's full-year estimate. No dividend was declared, in line with expectations.

YoY, revenue grew 20% to RM1.1b, driven by increased orders across its product portfolio. PBT surged 30% to RM82m, with margins improving to 7.2% (from 6.7% last year), supported by better operational efficiency. Correspondingly, its net profit also grew by 29% to RM63m.

QoQ, 2QFY25 revenue increased by 26%, though GP only grew 6% to RM76m, with margins dropping to 12% (from 14.3%) due to a less favourable product mix. However, operational efficiency improvements led to a 21% increase in PBT.

Outlook. In light of the ongoing inflationary pressures and rising production costs, SKPRES remains cautious and focused on maintaining a lean, efficient operating structure. The Group will continue to expand its Printed Circuit Board Assembly (PCBA), injection moulding, and engineering capabilities to broaden its product range with its key customer. The group expects growth momentum to continue in FY25 and FY26, driven by both existing and new customers, although it is still some way from its peak revenue of RM2.5b achieved in FY23. SKPRES is actively addressing customer concentration risk and working to diversify its base. Additionally, the new minimum wage hike is expected to have minimal impact, thanks to the cost pass-through mechanism, despite a slight time lag.

Forecasts. We make no changes to our FY25-26F earnings.

Valuations. Maintained our TP at RM1.35 based on unchanged targeted 16x FY26F PER. The valuation reflects about 10% discount to its peers' forward mean due to the group still lacking customer diversity compared to peers. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like SKPRES as: (i) 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 employs an effective cost pass-through model. Maintain OUTPERFORM rating.

Risks to our call include: (i) new products hitting mass production stage slower-than-expected, (ii) a weaker recovery in its order flow, and (iii) customer concentration risk stays high.

Source: Kenanga Research - 26 Nov 2024