What’s New

• 3QFY17 earnings disappointed, no thanks to higher operating expenses

• Raise FY17F revenue forecast for higher orders but maintain FY18F/FY19F forecast

• Cut FY17F/FY18F/FY19F margin assumption

• Maintain BUY with lower TP of RM1.60

Reiterate BUY. We cut our FY17F/FY18F/FY19F earnings due to higher operating expenses during the quarter. Margins did not recover as expected, following the resolution of the labour issues faced in 1HFY17. We believe margins will stay compressed due to the complexity of manufacturing the new products. However, we raise our FY17 revenue forecast to RM1.98bn from RM1.78bn. 9MFY17 registered revenue of RM1.36bn and we expect the revenue growth momentum to continue in 4QFY17. The growth is due to the popularity of existing products. We remain positive on SKPRES due to its close relationship with its main customer, client D.

Single-customer concentration risk not a pressing issue. In FY16, c.55% of revenue is derived from client D. Looking forward, we forecast this key customer to contribute an even higher portion, c.72% in FY17F. In the event that its key customer reduces or terminates contracts with SKPRES, the latter’s earnings could be materially and adversely affected. However, we are not overtly alarmed by this risk, as the contract wins are on a mid-term basis. SKPRES currently has two significant contracts from client D worth c.RM1.1bn p.a. which will run for another 4-5 years. Given its longstanding relationship with client D, we are positive about SKPRES’ long-term prospects as it has been able to continuously secure manufacturing contracts for client D’s latest flagship products.

Valuation

We maintain our BUY call on SKPRES with a revised TP of RM1.60. Our TP is pegged to FY18 PE of 14x, which is +1SD of its 5-year average forward PE. We believe that it deserves a premium valuation given its much stronger earnings growth than peers.

Key Risks to Our View

Slower-than-expected margins recovery. SKPRES’ net margin dropped to 5.3% in 9MFY17 (7.8% in FY16) due to operation shifts and labour issues. While this is resolved, it will take time for SKPRES to gradually achieve optimal efficiency levels. Thus, we conservatively forecast a net margin of 6% for FY178-19.

Source: Alliance Research - 1 Mar 2017