The sterling 78.7% rise in SKP’s share price over the past three months capped the upside to our TP. Downgrade to NEUTRAL (from Buy) with a higher SOP-based TP of MYR1.57 (from MYR1.18, 4% upside), which also implies 12.9x 2016 P/E. A recent visit to its new plant revealed all is well. Our earnings upgrade is made on the back of Dyson’s growth prospects and SKP’s capacity expansion done to cater to future orders.

Capacity expansion well on track, with room for more. We recently visited SKP Resources’ (SKP) new production facility in Johor and are happy to note that planned production may commence a month early, in September. The slated production of Dyson’s cordless vacuum cleaners is to occupy approximately 20% of floor space at the new plant. Accordingly, the remaining floor space has the potential to more than triple the company’s current production of Dyson items, as it would be facilitated by 16 additional production lines.

Earnings upgrade. We lift our earnings estimates by 12%/32%/31% for FY16/FY17/FY18 on the following: i) in end-2014, Dyson announced a 4-year capex of GBP1.5bn (GBP1.0bn for research & development (R&D)) and projects to develop four new ranges of technology – there is also a plan to launch 100 new products over the next four years, ii) a greater percentage win of Dyson’s contracts due to SKP’s commitment toprovide available capacity – this consequently allows it to be more operationally competitive as it takes steps to cater for future orders, and iii) earlier recognition of earnings as production is due to commence earlier than expected.

Risks and sensitivities. Key risks to our forecasts include growth that is in tandem with key customer Dyson’s future prospects and a weakerthan-expected global macroeconomic environment, which could dampen demand for consumer products. SKP practices a cost pass-through on its USD exposure and raw material cost wit h its clients each month.

Downgrade to NEUTRAL. Although SKP’s earnings growth remains highly intact with a 3-year CAGR of 62%, the recent impressive 78.7% surge in its share price has capped the upside to our TP to 4%. Therefore, we downgrade the stock to NEUTRAL (from Buy), but lift our SOP-based TP to MYR1.57 (from MYR1.18) with an implied 2016 P/E of 12.9x.