SKP Resources’ (SKP) 1QFY14 earnings made up only 21% and 22% of consensus’  and  our  full-year  estimates  respectively.    Revenue  fell 11.7%  y-o-y  due  to  weaker  orders  from  customers  while  earnings  slid 22.9%  y-o-y  on  rising  operating  costs  after  the  group  implemented minimum wage.  Downgrade  to  NEUTRAL,  with  our  new  FV  at  MYR0.37 (from MYR0.40).  

- Below  expectations.  SKP’s  1QFY14  sales  eased  11.7%  y-o-y  to MYR108.3m from MYR122.7m in 1QFY13, while earnings shrank 22.9% y-o-y to MYR9.1m from MYR11.8m. The weaker y-o-y performance was mainly  due  to  the  drop  in  sales  from  existing  customers  during  the period, as well as the impact of the minimum wage implementation early this  year.  Meanwhile,  the  group’s  performance  fared  better  on  a sequential  basis,  with  1Q14  net  profit  rising  30%  q-o-q  to  MYR9.1m  on the  back  of  a  22.9%  q-o-q  improvement  in  revenue  to  MYR108.3m,  on the back of lower 4Q13 sales in conjunction with the festivities in 4Q.  

- Minimum  wages  erode  margins.  Gross  profit  margin  was  weaker  by 1.2ppt  y-o-y  to  14.8%  (1Q13:  16%),  no  thanks  to  higher  cost  of  sales from the implementation of minimum wages and lower sales. This led to EBIT  margin  contracting  1.9ppt  y-o-y  to  10.6%  (1Q13:  12.5%).  The narrower  margins  reaffirm  our  earlier  view  that  SKP’s profitability  will come under pressure going forward due to higher operating cost arising mainly from the implementation of minimum wages.

- Forecasts.  We  are  cutting  our  FY14  and  FY15  earnings  forecasts  by 6.4%  and  10.9%  respectively  given  the  higher  than  expected  operating costs.  The  key  investment  risks  are  lower  orders  from  key  customers and weaker consumer consumption.

- Downgrade  to  NEUTRAL.  We  revise  lower  our  FV  to  MYR0.37  from MYR0.40,  based  on  9x  CY13  EPS.  Downgrade  to  NEUTRAL  as  the stock is currently trading on par with its peer valuation of about 8-9x P/E.

Source: RHB