• Maintain BUY, new TP of MYR2.22 from MYR2.40, 50% upside with c.5% FY23F (Mar) yield. SKP Resources’ record FY22 results met expectations, with better operating efficiency propelling an encouraging 28% YoY earnings growth. The arrival of a new labour intake and the commissioning of more production lines would be the key earnings growth drivers in FY23F (+24%), whilst labour-related concerns are close to being resolved. Its current valuation is attractive, taking into account the strong earnings growth and the sector’s insulation from a rising cost environment.

• FY22 results are within expectations. This is despite its net profit of MYR165m (+28% YoY) accounting for 103-106% of our and consensus forecasts, as 4QFY22 was aided by a favourable effective tax rate (ETR). Post-results, we make no material changes to FY23-24F earnings, and take opportunity to introduce our FY25F net profit (+8% YoY). We cut our TP to MYR2.22 (no adjustment accorded, on its ESG score of 3.0), based on a lower 17x FY23F P/E, or close to +1SD from its 5-year mean. This is consistent with the adjustment we made to the technology sector and its peer VS Industry (VSI MK, BUY, TP: MYR1.26), as we factor the aggressive rate hike expectation and high bond yields into our valuations.

• Results review. YoY, FY22 revenue inched up by 2% to MYR2.3bn, notwithstanding various challenges throughout the year including lockdown restrictions as well as the shortages of labour and parts components, with the order demand from its key customer remaining solid. That said, FY22 operating profit surged 30% YoY to MYR214m on a 2ppt margin expansion, driven by improved operation efficiency and higher contributions from printed circuit board assembly production. QoQ, 4QFY22 revenue slipped 14% to MYR577m due to the Lunar New Year break and seasonal swing. However, 4QFY22 core net profit was able to stay level after recognising a reinvestment allowance which led to a low ETR of 8.9%.

• New labour supply to drive robust FY23F growth. We understand that the new intake of foreign workers will arrive in batches from June onwards, and that should relieve the current constraint and facilitate the commissioning of two new production lines in July. In addition, SKP has secured another new contract that is scheduled to start production in December. As such, we expect earnings to pick up strongly in 2HFY23. Meanwhile, the construction of new production facility is on track to be completed by end-2022, and provide much-needed new capacity. On the other hand, we gather that the labour audit is completed – SKP expects positive results when the report of the findings is released in 1-2 weeks

• Downside risks to our recommendation include delays in the commissioning of new production facility and market share loss.

Source: RHB Research - 30 May 2022