SKP  Resources’  (SKP)  1HFY14  earnings  missed  estimates,  falling 20.3% q-o-q on lower sales, which in turn hurt margins. Accordingly, we cut our  FY14-15 net profit  forecasts  by 19.2 and 22.1%  respectively.  the company’s  weak outlook, poor liquidity and  the  absence of an interim dividend prompts us to downgrade the stock to a SELL, with a lower FV of MYR0.20 sen pegged to 7x CY14 EPS.

• Results miss  forecasts.  2QFY14  net profit  fell 20.3% q-o-q and 39.2% y-o-y  to  MYR7.3m  while  sales  dipped  2%  q-o-q  and  12.4%  y-o-y  as Dyson’s  orders  for  vacuum  cleaners  slowed  down.  This  resulted  in 1HFY14 earnings declining to MYR16.4m, coming in at just 42.1% of our original  forecast.  SKP  sales  are  not  seasonally  stronger  in  2H.  No dividend was declared vs a 1.3 sen interim dividend in 2QFY13.
• Sales and margins  weaken. EBITDA dropped  15.7% q-o-q and 36.3% y-o-y  due  to:  i)  a  lower  margin  product  mix,  and  ii)  higher  overhead costs. We are concerned by the drop in sales to Dyson, which by itself contributes  c.  55%  of  total  sales.  While  SKP  has  other  customers  for video and computer plastic parts, sales do not appear to be growing fast enough to compensate for the drop in Dyson’s orders.
• Cutting forecasts. We are thus cutting  our  FY14-15 forecast by 19.2% and  22.1% to MYR31.5m and MYR31.7m respectively  on incorporating:i)  a 1% contraction in FY14 revenue forecast vs an assumption of +2.0% growth originally, due to  the persistent  decline in  SKP’s  sales,  and ii) a lower 15.5% GP margin vs our original 17% estimate. As at 1HFY14, GP margins  stood  at  14.2%.  While  we  do  not  expect  seasonally  stronger sales  in  2H,  SKP  is  attempting  to  cut  production  and  overhead  costs.This is our second earnings downgrade since June this year.
• Downgrade to SELL, lowering FV to 20  sen. We downgrade the stock to  SELL  (from  NEUTRAL),  with a lower FV of 20  sen  (from 37  sen). Our new FV is based on: i)  our lowered  CY14 EPS estimate,  and ii) a  lower 7x target P/E  vs 9x, in line with the stock’s  6-year historical mean. SKP’s valuations  are  rich  amid  a  murky  earnings  outlook  and  poor  liquidity. Although  it  is  still  cash  rich,  we  feel  that  unless  the  company  pays  a special dividend, the stock will be short on re-rating catalysts.

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Company Profile
SKPRES is principally involved in the manufacturing of plastic parts and components, contract manufacturing, precision mould  making, the sub-assembly of electronic and electrical equipment and other secondary processes.

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Source: RHB