• Maintain BUY, with new TP of MYR1.95 from MYR2.22, 24% upside and 5% FY23F (Mar) yield. Post plant visit, we look forward to the exciting earnings delivery in the immediate upcoming quarters, driven by the robust order demand from a key customer and arrival of new labour supply. SKP Resources is our preferred pick in the sector – premised on Customer X’s distinctive customer profile, which we deem to be more resilient in the challenging global macroeconomic environment going forward.

• Approaching the two defining quarters. Boosted by the arrival of new foreign labour intake, we believe SKP is well positioned to ramp up its production volume to capture the strong seasonal demand towards the year-end, as the company continues to receive overwhelming demand orders from Customer X. With that, we anticipate sales to accelerate progressively in 2Q-3QFY23F and exceed the historical high level of MYR726m achieved back in 2QFY20. This, together with the ensuing higher production efficiency on economies of scale, should put it on track to achieve the 24% earnings growth we forecasted for FY23. Post-visit, we make no changes to our earnings forecasts.

• New capacity to come on stream by early 2023. We managed to get a glimpse of Site 5, which is currently under construction and scheduled to complete by early 2023. The latest production facility is estimated to lift SKP’s total floor space by 40-50% or 650k sq ft, providing the company additional capacity to take on more orders from existing customers. In addition, it will be able to further internalise its production by expanding the printed circuit board assembly (PCBA) and battery pack capacities in the new site. On top of that, the new facility should also set the stage for SKP to bring in new customers in order to boost orderbook and diversify its revenue stream.

• Valuation and recommendation. We reduce our TP to MYR1.95 (no ESG adjustments accorded) after ascribing a lower P/E multiple of 15x (from 17x) to FY23F EPS, in line with our valuation downgrade for the technology sector given the more cautious macroeconomic picture and rising interest rate environment. The valuation will imply 15%, or 2x multiple premium over the one pegged to peer VS Industry (VSI MK, NEUTRAL, TP: MYR0.86). We believe SKP will be exposed to a relatively lower degree of slowdown risks considering Customer X's distinctive customer profile. Current valuation remains attractive considering the robust earnings growth, insulation from the inflationary environment thanks to the cost plus model and decent dividend yield backed by the sturdy balance sheet.

• Risks to our recommendation include a major global economic slowdown and delay in the commissioning of its new production facility.

Source: RHB Research - 18 Oct 2022