SKP Resources  (SKP)’  3QFY14  results  missed estimates, with revenue falling  17.3%  q-o-q  on  weaker  sales  to  its  major  customer,  Dyson.  Its 9MFY14 net profit of MYR21.8m made up only 69% of our FY14 forecast.We  lower  our  FY14/15  net  profit  estimates  by  10%/6.1%,  given  the recent  electricity  tariff  hike  and  the  impact  from  the  minimum  wage policy. Maintain SELL, with a lower MYR0.18 FV (from MYR0.20).

• Below  estimates.  SKP’s  results  had  fallen  short  of  estimates  for  two consecutive  quarters.  Its  9MFY14  revenue  and  net  profit  came  in  at MYR302.2m and MYR21.8m respectively, accounting for only 72% and 69%  of  our  FY14  forecasts.  Its  9MFY14  earnings  were  hurt  by  lower sales volume to its major customer, Dyson.  We expect earnings growth to remain soft in 4Q, which is a seasonally weaker quarter.
• Revenue  and  margins  weaken  further.  Following  two  consecutive quarters of lower q-o-q and y-o-y numbers, SKP’s  3QFY14 revenue and net profit continued to fall, down 17.3% and 25.7% q-o-q respectively. Yo-y, revenue and  net profit  slid 3% and 44.5% respectively. The sharp margin  decline  was  mainly  attributed  to  higher  expenses  incurred following the implementation of the minimum wage policy.
• Key risk. We expect SKP’s earnings to continue to be affected by: i) its dependence  on  its  major  customer,  Dyson,  and  ii)  the  recent  hike  in electricity  tariff. We  trim  our FY14/15  net  profit  forecasts by  10%/6.1% respectively,  on  incorporating  higher  expenses  driven  by  the  minimum wage  policy  and  the  electricity  tariff  hike.  SKP’s  outlook  remains uncertain due to lukewarm consumer spending in China, one of Dyson’s major export markets
• Maintain SELL; lower MYR0.18 FV. We maintain our SELL call on SKP and  reduce  our  FV  to  MYR0.18  from  MYR0.20,  after  adjusting  our FY14/15  numbers,  as  we  find  that  the  company:  i)  lacks  re-rating catalysts, ii) has poor liquidity, and iii) is trading at a higher P/E of 10x vs. its 6-year historical mean of 7x, despite weak earnings growth.

Financial Exhibits

SWOT Analysis

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

Recommendation Chart

Source: RHB