• Upgrade to BUY from Neutral, with higher MYR1.31 TP (from MYR0.78), 20% upside, c.4% FY25F (Mar) yield. SKP Resources’ FY24 results outperformed expectations on higher-than-expected sales. Outlook is promising, considering the rebound in orders from its key customer, while its plan to diversify its earnings stream is progressing well. This prompted us to raise our valuation yardstick as we view SKP as a proxy to the global demand recovery and opportunities from the trade war diversion.

• FY24 results slightly above expectations. Net profit of MYR97m (-33% YoY) accounted for 103-104% of our and consensus’ forecasts on higher-than- expected FY24 sales. Post results, we raise FY25-26F earnings by 10-13% to factor in the stronger orders from key customers. Correspondingly, our TP rises to MYR1.31 (inclusive of a 6% ESG discount), based on a higher 15x 2025F P/E (from 12x) to reflect the optimism of order recovery and customer diversification. The valuation implies a slight discount to the 16x ascribed to peer VS Industry (VSI MK, BUY, TP: MYR1.02).

• Results review. YoY, FY24 revenue dipped 26% to MYR1.9bn following a material reduction in orders by a key customer on the back of soft global demand. Notwithstanding, FY24 GPM expanded by 0.6ppts on higher contribution from the printed circuit board (PCB) component. Meanwhile, FY24 opex was 13% lower as a result of fewer outsourced jobs to subcontractors. With that, FY24 PBT fell 31% to MYR126m. QoQ, 4QFY24 revenue inched up 1% to MYR459m despite the weaker seasonality (fewer working days in 4Q), thanks to stronger orders from its key customer. That said, 4QFY24 GPM slipped 1.8ppts, likely a function of product mix, but this was more than offset by higher other operating income and opex efficiency. As a result, 4QFY24 net profit jumped 5% QoQ to MYR25m.

• Outlook. We gather that orders from SKP’s key customer have been gradually increasing since early-2024 as demand in key markets recovers. This should translate to a robust QoQ sales and earnings momentum going forward. Meanwhile, the strategy to diversify its earnings stream is gaining pace, with SKP securing its second customer of the year. Mass production for both customers is scheduled to start in Oct 2024, and the combined annual revenue contribution is estimated at MYR140m. On top of this, we understand that the company is in talks with several other potential customers and more job wins could materialise before the commencement of Plant 5 operations in Oct 2024.

• Risks to our recommendation include a sizeable loss in market share and major supply chain disruptions.

Source: RHB Research - 4 Jun 2024