We emerged from a meeting with management feeling more positive over the company’s prospects. After updating our earnings forecasts, we upgrade our call to BUY (vs. Neutral) with a higher MYR1.18 TP (39% upside). Dividend yields for FY16F-17F (Mar) are also decent at 4.5-6%. We also expect increased orders from its key customer, Dyson, from a new contract to manufacture Dyson’s handheld vacuum cleaner.
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Expect stronger orders from Dyson. We understand from management that SKP Resources has secured a new contract to manufacture another model of vacuum cleaner for Dyson, which is a handheld vacuum cleaner. Prior to this, SKP Resources only producedupright vacuums for Dyson. We note that the handheld vacuum cleaneris Dyson’s bestselling type of vacuum cleaner, as well as being the fastest growing one across Dyson’s product offerings. The company expects to start production of the handheld vacuum cleaner in 2H15.
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Additional capex of MYR20-30m for new machinery . Given that SKP Resources’ cash pile has been utilised to fund the recent acquisition of Tecnic (TEC MK, NR), management revealed that the additional capex will be funded through borrowings. The company would still have net cash after the acquisition, as it anticipates its operating cash flow inFY16-17 to be healthy.
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Forecasts and risks. After factoring in the new contract, we lift our FY16/FY17 earnings forecasts by 4-29%. We also take the opportunity to trim our FY15 estimate by 3.4% due to the spillover of the teething problems experienced in 3QFY15-4QFY15. Key risks to our forecasts include: i) a weaker-than-expected global macroeconomic environment, which could dampen demand for consumer products, and ii) loss of orders from its key customer, Dyson.
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Upgrade to BUY with a revised TP of MYR1.18. Following our earnings revision and after rolling over our base year to 2016 from FY16, we upgrade our recommendation to BUY (from Neutral) with a revised TP of MYR1.18 (from MYR0.85), based on a higher P/E of 12x (from 11x), compared to its closest peer VS Industry’s (VSI MK, NEUTRAL, TP: MYR4.10) target P/E of 10x. The premium is deserved,due to its higher earnings growth and net cash position. With a minimum payout policy of 50%, it also offers decent dividend yields of 4.5-6% for FY16-17 (on a fully-diluted basis).
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