SKP’s 1HFY16 earnings of MYR36.3m made up only 37%/39% of our/consensus forecasts respectively. While we expect an improved 2H, we trim our earnings forecasts after moderating our sales assumptions. Maintain NEUTRAL with a higher SOP-based TP of MYR1.42 (from MYR1.38, 1% upside), as we think the near-term growth prospects have mostly been priced in.

1H16 earnings of MYR36.3m. SKP Resources’ (SKP) 1HFY16 (Mar) earnings only reached 37%/39% of our/street’s full-year forecasts respectively. Core earnings grew an impressive 80% YoY in 1HFY16 on the back of an 85% YoY increase in revenue. Excluding contribution from its subsidiaries acquired in 1QFY16, we estimate that 1HFY16 revenue could have grown 40-50% compared to a year ago. The quarter under review also saw greater revenue contribution from Dyson, which we estimate to be 15% higher QoQ.

Forecast and risks. We expect 2HFY16 earnings to improve as production for the MYR400m cordless vacuum cleaner contract only started in September, while production for the MYR600m cordless vacuum cleaner contract will only commence in January 2016. Nonetheless, we trim our earnings forecasts by 10.3%/6%/1.2% for FY16/FY17/FY18 respectively, after taking into consideration: i) lower sales assumption, partly as we factor in lower initial output as SKP moves up the learning curve for the production of new cordless models, ii) a lower effective tax rate as the company is a beneficiary of the reinvestment allowance (RA) announced in Budget 2016, and iii) higher wage cost due to a hike in national minimum wage starting 2H16. Key risks to our forecast include: i) weak consumer sentiment that could dampen demand for consumer electronics, and ii) loss of contracts from its key customer Dyson.

Maintain NEUTRAL with a higher MYR1.42 TP as we think the near-term earnings prospects have mostly been priced in at current levels. We remain positive on SKP’s prospects as it is a major proxy to Dyson’s massive expansion plans; given its ample available capacity, SKP is well-positioned for future job wins. We roll over our valuations to FY17F to better capture new contract contributions from Dyson, and raise our SOP-derived TP to MYR1.42 (from MYR1.38), based on an unchanged 11.3x FY17F P/E. Our corroborative DCF valuation is also supportive of our TP.

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Company Profile

SKP Resources (SKP) is an electronics manufacturing services (EMS) provider, principally involved in the manufacturing of plastic components, precision mould making, advanced secondary processes, sub-assembly of electronics equipment and full turn-key contract manufacturing.

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Source: RHB Research - 30 Nov 2015