Review

• SKP’s 1QFY24 net profit of RM21.6mn (+7.4% QoQ, -41.9% YoY) met ours and consensus full-year estimates at 21.9% and 18.9% respectively. We expect to see improvements in 2QFY24 to 3QFY24 on the back of year end festive sales.

• YoY. 1QFY24’s net profit declined 41.9% YoY to RM21.6mn, dragged by: i) softer demand for household electronics amid macroeconomic headwinds, ii) higher operating expenses, especially for manpower which was earlier ramped up, and iii) higher depreciation and amortisation costs alongside capacity expansion. The lower utilisation rate led net profit margin to narrow 1.7pp YoY to 5.0%.

• QoQ. Revenue contracted 13.7% QoQ to RM431.6mn on softer demand. Despite weaker revenue, 1QFY24’s net profit climbed 7.4% QoQ to RM21.6mn due to a more favourable product mix. Net profit margin expanded 1.0pp QoQ to 5.0%.

Outlook

• While we foresee SKP’s near-term outlook to remain subdued, we expect to see improvements in 2QFY24 to 3QFY24 on the back of year end festive sales. Notwithstanding, we remain sanguine on the group’s medium-to-longer term prospects, supported by its customers new model launches and product portfolio expansion, along with opportunities from the China Plus One strategy.

• Facilitative of growth, SKP’s new plant in Senai, Johor with estimated floor space of 650k sq ft is expected to enlarge SKP’s capacity by ~50%. Plans are to expand its printed circuit board assembly, plastic injection moulding, and engineering capabilities.

Impact

• We maintain our earnings forecast.

Valuation & Recommendation

• In all, we maintain our TP for SKP at RM1.10 based on 13.0x CY24F EPS which -1.0SD to the stock’s 5-year average of 18.0x. However, given the stock’s improved risk reward potential with the stock currently trading at 10.9x CY24F EPS, we upgrade our recommendation on the stock from Hold to Buy.

• Key downside risks include lower-than-expected utilisation and inability to secure new contract manufacturing jobs.

Source: TA Research - 28 Aug 2023