Review

• SKP Resources reported a 9MFY17 profit of RM71.4mn (+33.9% QoQ, +18.1% YoY). The results were within ours but below consensus estimates at 64.6% and 62.1%. No dividends were declared. We expect a better last quarter.

• As anticipated, revenue and earnings increased 27.1% QoQ and 33.9% QoQ on higher electronic consumer product (ECP) volumes. The 2nd and 3rd ECP lines were completed in September and December 2016 respectively. Labour issues have been solved, with new foreign workers progressively arriving since September 2016. Net profit margins, however, remained low at 5.2%. This was attributed to the weakening ringgit, leading to higher component costs. Absolute profits remain as anticipated, as this was offset by a corresponding increase in revenue.

Impact

• We adjust our revenue and cost of sales estimates to take into account the impact of the weaker ringgit. Our FY17/FY18/FY19 earnings are revised slightly by -0.1-0.2% to RM110.6mn/RM171.2mn/RM207.6mn.

Outlook

• Near term earnings will be driven by the full ramp up of its cordless vacuum cleaner and ECP lines. In line with increasing demand for its end customer’s products, volumes are expected to gradually increase in the coming quarters.

• In terms of capacity, 35% of its new factory has now been utilised. Future prospects will be dependent on its ability to secure new contracts. We believe there are ample of opportunities to achieve this. Its UK customer targets to launch 100 new products over the next few years.

Valuation

• We value SKP Resources at an unchanged TP of RM1.75/share – based on a PE of 14x and CY17 EPS of 12.5sen. We like the stock for its strong earnings growth potential, at an estimated three year CAGR of 36.6% YoY. This, we expect, will be driven by further contract awards at its new factory. Dividend yields are also attractive at 3.2-6.0%. BUY.

Source: TA Research - 1 Mar 2017