SKP, which was  suspended on Monday,  has  proposed to acquire three of  Tecnic’s  operating  companies  for  MYR200m.  Maintain  BUY. Following the earnings upgrade from the proposed acquisition, we raise our TP to MYR0.85 (from MYR0.75),  pegged to a  FY16 P/E of 11x,  a 21% upside.  We  are  positive  on  the  acquisition  as  it  enables  SKP  to consolidate its position as a leading plastic component manufacturer.

An  earnings  accretive  acquisition.  The  purchase  consideration  of MYR200m  values  the  three  companies  at  an  acquisition  P/E  of  11.3x, based  on  their  trailing  four  quarters  PAT  of  MYR17.6m,  which  we consider  fair.  The  acquisition  is  value  accretive,  given  SKP  Resources (SKP)’s  current P/E of 13.7x. We are positive on the acquisition as it willlikely  increase  SKP’s  market  share  and  strengthen  its  position  as  a leading  plastic  component  manufacturer,  given  the  target  companies’ strong  capabilities  in  the  precision,  mould  designing  and  fabrication business.  

Salient  details.  The  acquisition  is  a  related  party  transaction  as  the major  shareholder,  Dato’  Gan  and  family,  currently  collectively  own 70.5%/68.7%  in  SKP  and  Tecnic  Group  (TEC  MK,  NR)  (Tecnic)respectively.  The purchase consideration  will be funded by MYR100m of internally-generated  funds  and  the  remainder  from  the  issuance  of 172.4m  new  SKP  shares  (19.2%  of  existing  share  base)  at  an  issue price  of  MYR0.58  per  share.  The  shareholding  of  Dato’  Gan  and  his family will drop to 68.4% from 70.5% after the proposed acquisition.

Forecasts.  The  acquisition  is  expected  to  be  completed  by  2Q15.  As such,  we  keep  our  FY15  earnings  forecast  unchanged  but  raise  our FY16 forecast by 22.9%, following the full consolidation. For FY15/FY16, Dyson sales are estimated to account for 58%/54% of SKP’s total sales. 

Risks.  Key  risks  include:  i)  a  weaker-than-expected  macroeconomic environment,  which  could  dampen  consumer  demand  for  electrical items, and ii) loss of orders from key customer, Dyson

Investment  case.  Following  the  earnings  upgrade  from  the  proposed acquisition, we raise our TP to MYR0.85 (from MYR0.75), pegged to aFY16 P/E of 11x. The stock is currently trading at an undemanding FY16P/E  of  7.6x.  With  a  minimum  payout  policy  of  50%,  it  also  offers attractive forecast dividend yield of 6.1% for FY16.

Source: RHB