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Downgrade to NEUTRAL from Buy with new MYR1.43 TP from MYR1.95, 3% downside. SKP Resources’ 9MFY23 (Mar) results disappointed on lower-than-expected volume following a downward revision of order demand from key customers. We could have been too optimistic with our previous thesis of the company having a resilient earnings profile, hence, the necessary earnings cut. However, we are not assuming the worst for SKP as we expect new products to roll out and contribute in 2HFY24F, mitigating some of the 1HFY24F weakness.
SKP’s 9MFY23 results were below both our and consensus expectations. Net profit of MYR124m (+5% YoY) met only 70-71% of our and Streets estimates, and we expect a softer 4QFY23F ahead on reduced orders from key customers and the seasonality factor. Post-results, we slash FY23F-25F earnings by 13-20% to build in the revised guidance from management. We also cut our TP to MYR1.43 (no adjustment on ESG score of 3.0), now based on a lower P/E of 13x (from 15x) to reflect the slowdown risks stemming from the challenging global growth outlook. The valuation is now in line with the stock’s 5-year mean and the one ascribed to peer VS Industry (VSI MK, NEUTRAL, TP: MYR0.86)
Results review. YoY, 9MFY23 revenue jumped 17% to MYR2bn thanks to higher production throughput whilst 9MFY22 was affected by labour and parts component shortages. Operating profit grew 4% to MYR160m with margin slipping by 1ppt, dragged down by unfavourable product mix and higher start-up costs incurred for new models. QoQ, 3QFY23 revenue was flattish at MYR740m despite contribution from new products, due to reduction in orders from a key customer towards the end of the quarter. Net profit dipped 12% to MYR41m on lower GPM, taking into account an unfavourable product mix and initial start-up costs for new products.
Speed bumps ahead. We foresee 4QFY23F numbers to further slip in view of the fewer working days and subdued demand from key customers. This could be on the back of the customers’ cautious stance in anticipation of the challenging global macroeconomic environment ahead. Hence, such weakness should persist into FY24F whilst we also expect higher operating costs arising from higher wages (Employment Act amendment) and electricity costs (higher tariff) before more clarity on the relevant cost pass- through to customers. Our FY24F earnings growth of 7% takes into account the contribution of new products in 2HFY24F.
Risks to our recommendation include better/worse-than-expected global economy growth and higher/lower-than-expected market share.
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