• Maintain NEUTRAL and TP of MYR0.95, 3% upside. We consider SKP Resources’ (SKP) 1QFY24 (Mar) results as broadly within expectations notwithstanding the sales softness, after taking into account the stronger seasonality ahead. Whilst we have imputed a relatively better demand outlook towards 2HFY24 into our forecasts, we believe current valuation – trading close to 5-year mean - is not attractive enough for us to turn positive on the stock as we also await better clarity on the commencement of new production lines and prospects of new customers.

• 1QFY24 results were deemed broadly within expectations on anticipation of stronger quarters driven by seasonality. Net profit of MYR22m (-42% YoY) accounted for 18-19% of our and consensus’ forecasts. Post-results, we make no material changes to our earnings forecasts and maintain a TP of MYR0.95 (inclusive of a 4% ESG discount) which is based on 13x P/E FY24F, close to its 5-year mean and in line with the valuation ascribed to its peer VS Industry (VSI MK, NEUTRAL, TP: MYR0.84).

• Results review. YoY, 1QFY24 revenue dipped 22% to MYR432m on softer order demand from key customers against the backdrop of challenging macroeconomic outlook and cautious consumer sentiment. Correspondingly, 1QFY24 operating profit fell 43% to MYR28m with margin slipping by 2.4ppt as a result of lower utilisation rates and higher production costs. QoQ, 1QFY24 revenue was 14% lower due to the aforementioned slowdown in demand. That said, 1QFY24 operating profit represented a 25% QoQ jump primarily thanks to a more favourable product mix which expanded the margin by 2ppt. After accounting for a normalisation of effective tax rate to 22.9% from 6.9% in 4QFY23, 1QFY24 net profit was 7% higher QoQ.

• Outlook. Going forward, we expect earnings momentum to pick up in the next two quarters in view of the seasonal ramp-up for year-end festive demand. That said, we gather that there is still no firm dateline for new production lines to commence whilst the order prospects or visibility beyond the seasonal pick-up are still uncertain at this juncture. Meanwhile, we understand that there are talks with some potential customers with new plant coming on stream by end-2023 but material contract wins are unlikely to pan out in the near-term. To sum it up, the lower sales volume of existing customers without contribution of new production lines or new customers on board translate into our forecasted FY24 net profit decline of 20%.

• Risks to our recommendation include better/worse-than-expected global economy growth and higher/lower-than-expected market share.

Source: RHB Securities Research - 28 Aug 2023