We recently visited  SKP  Resources  in Johor Bahru and emerged  more positive over the company’s  prospects.  It  is poised to achieve  a  2-year earnings CAGR of 57.9% on the back of a  75% expansion in capacity  to cater to  increasing orders from  its key customer,  Dyson. Maintain BUY, with  a  new  fully -diluted  FV  of  MYR0.75  (from  MYR0.54),  based  on  a CY15 earnings P/E of 11x (from 10x).

• Highlights  from  our  recent  visit.  We  were  impressed  with  SKP Resources’  recently-installed MYR8m state-of-the-art paint shop, which is the first in Malaysia.  The  new factory, which will have  added  capacity,is expected  be on track for commissioning  by 4Q14.  Management  also provided  insight  into:  i)  its  current  operation,  ii)  expansion  plan,  iii) Dyson’s new product lines, and iv) the industry landscape.
• Key  customer  Dyson  to  drive  earnings  CAGR  of  57.9%  in  FY14-FY16.  We  lift  our  FY15/FY16  earnings  forecasts  by  14.9%/29.8% respectively after factoring in: i)  a  growth in orders for existing and new products  from  Dyson,  ii)  capacity  expansion  as  well  as  an  improved utilisation rate of 85% from 75% in 4QFY14. We tweaked our net margin assumptions slightly higher due to  a better product mix  and an  improved utilisation rate, as well as the company’s cost management strategy.
• Key  risks.  Key  risks  include:  i)  a  weaker-than-expected  global macroeconomic environment that could dampen consumer demand for electrical items, and ii) loss of orders from key customer Dyson, which made up 55% of total sales in FY13.
• Investment case.  We reiterate our BUY call with a new fully-diluted  FVof  MYR0.75  (from  MYR0.54),  based  on  the  assumption  of  a  full conversion  of  the  180m  outstanding  warrants  and  inclusive  of  cash proceeds  from  the  conversion.  Our  new  FV  is  derived  from  rolling forward our base year to CY15 and applying a target P/E of 11x (from 10x),  broadly  in  line  with  its  closest  peer  VS  Industry’s  (VSI  MK, NEUTRAL,  FV:  MYR1.75)  valuation  of  10x.  With  a  minimum  50% dividend  payout policy, it also offers  attractive  forecast  annual dividend yields of 6.5% and 7.2% for FY15 and FY16 respectively.

Earnings Set To Surge 
Dyson  to contribute >65% of sales from FY15 onwards. According to a  Metro UKnews article in Sept  2013,  Dyson’s profits  grew 19%  y-o-y  in 2012 on the back of a 17%  y-o-y  increase in its sales  –  thanks to strong demand across Germany, Japan, Russia, France, Spain, Australia and New Zealand.  40% of its  sales come from the US,  and  we opine that  the  economic recovery in the US  and Europe could  boost its sales further,  going forward. As such,  SKP Resources will be riding on  the expected surge in  Dyson’s sales  in the coming years  and expects  Dyson to contribute more than 65% of total sales from FY15 onwards.  We also understand that its competitor, VS  Industry,  is  diversifying  its  sales  away  from  Dyson  and  this  could  potentially translate  into  more  orders  from  Dyson  for  SKP  Resources.  As  the  company  has recorded a  stellar performance in various aspects such as quality of products, timely delivery  as  well  as  strategic  cost  management,  we  believe  the  potential  growth  in orders for Dyson’s existing and new product lines is well-deserved

Net margins  of ~10% to be sustainable. We note that SKP Resources recorded a net  margin  of  7.1%  for  FY14  due  to  a  lower  utilisation  rate  as  well  as  a  higher proportion  of  low-margin  products  in  its  sales.  We  estimate  net  margins  to  be ~9%/10%  for  FY15/FY16  respectively,  helped  by:  i)  an  improved  product  mix,  ii) higher  utilisation,  iii)  reduced wastage  due  to  better  tooling,  as  well  as,  iv)  its  cost management strategy.

New  factory  to  be  commissioned  by  4Q14.  The  construction  of  the  new  factory that will accommodate a 75% capacity expansion over three years is estimated to be completed by Oct 2014. Management also revealed that approval has been obtained for  the  hiring  of  350  additional  workers  for  the  factory.  FY15  will  be  a  year  of expansion for SKP Resources,  as capex is estimated to  reach  MYR40m-MYR50m. As the company is sitting on a cash pile of MYR93m as at end-FY14, the capex will be fully funded by internal resources.

Source: RHB