• Maintain BUY and MYR1.31 TP, 25% upside and c.4% FY25F (Mar) yield. SKP Resources’ 1HFY25 results met expectations thanks to a solid topline recovery. The momentum should sustain into 2HFY25F whilst the upside potential to earnings beyond the immediate term will hinge on the recovery pace of Customer X’s key market. We continue to like SKP as a proxy to capitalise on the recovery of global demand for consumer electronics and opportunities arising from the trade war diversion.

• SKP’s 1HFY25 results were in line with expectations. Core net profit of MYR63m (+29%) accounted for 53% and 52% of our and consensus forecasts. Post results, we make no changes to our earnings forecasts and TP of MYR1.31 (inclusive of a 6% ESG discount), which is based on 15x 2025F P/E. The valuation is at +1.5SD from the stock’s 5-year mean and represents a discount over close peer VS Industry (VSI MK, BUY, TP: MYR1.39), warranted by the latter’s larger market capitalisation.

• Results review. YoY, 1HFY25 revenue climbed 20% to MYR1.1bn, underpinned by a recovery of Customer X’s orders with 1HFY24 dampened by a slowdown in global demand. Notwithstanding, 1HFY25 GPM slipped 0.9ppt to 13% – a function of unfavourable product mix. That said, 1HFY25 PBT still surged by 30% to MYR82m in tandem with volume growth. QoQ, 2QFY25 revenue jumped 26% QoQ driven by better seasonality and the abovementioned demand normalisation. Similarly, 2QFY25 GPM was thinner QoQ due to the product mix as well as start-up costs related to new production lines. Correspondingly, 2QFY25 net profit rose 21% to MYR34m.

• Outlook. By and large, we expect the positive momentum to sustain into 2HFY25F on higher customer demand, thereby anchoring the earnings recovery in FY25F. This will be largely underpinned by the normalisation of Customer X’s orders from the inventory adjustments in 2023. Meanwhile, SKP is scheduled to start the production lines of the two new customers it secured earlier by end-2024. Whilst the earnings contribution may be immaterial in FY25F, a smooth ramp-up of the US-based customer could lead to a more significant order volume in FY26F. Management guided a sales value of MYR100m in the first year and the potential of the value doubling in the second year. In addition, talks are ongoing with several potential new customers and SKP is aiming to secure one by end-2024.

• Risks to our recommendation include a significant loss of market share and major delays in the start-up of a production line.

Source: RHB Securities Research - 26 Nov 2024