Review

• SKP’s 1HFY24 net profit of RM48.7mn (-41.8% YoY) came within ours and consensus full-year estimates at 49.3% and 43.7% respectively.

• YoY. 1HFY24’s net profit declined 41.8% YoY to RM48.7mn, dragged by: i) softer orders from a key customer for consumer/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. Revenue contracted 26.3% YoY to RM951.5mn. The lower utilisation rate coupled with additional costs, caused the net profit margin to narrow 1.4pp YoY to 5.1%.

• QoQ. 2QFY24’s net profit increased 25.4% QoQ to RM27.1mn with revenue higher 20.5% QoQ to RM519.9mn on increased orders from a key customer. Note that SKP’s 2QFY and 3QFY are typically seasonally stronger quarters with its key customer restocking inventory ahead of year-end festive sales. Together with cost optimisation initiatives, the net profit margin improved 0.2pp QoQ to 5.2%.

Outlook

• Management is cautious in the near term, with orders expected to remain soft amid prevailing macroeconomic headwinds. Notwithstanding, we remain confident in the group's medium-to-longer term prospects, supported by its customer's new model launches, product portfolio expansion, and opportunities from the China Plus One strategy.

• Facilitative of SKP's medium-to-long-term growth is its new plant in Senai, Johor. Its estimated floor space of 650k sq ft is expected to enlarge SKP's capacity by ~50%. The group has successfully obtained the certificate of completion and compliance for the new factory. Plans for the new space include expanding its printed circuit board assembly, plastic injection moulding, and engineering capabilities.

Impact

• We have cut our FY24F/FY25F/FY26F earnings estimates by -9.4%/- 25.8%/-7.3% as we conservatively toned down our sales by -10.3%/- 21.7%/-9.5% to reflect cautiousness against prevailing macroeconomic headwinds and its dampening effect on demand for consumer/household electronics. Effectively, we now project FY24F/FY25F/FY26F sales growth of -28.7%/+7.7%/+28.6%.

Valuation & Recommendation

• Corresponding to our earnings downgrade, we have lowered our TP for SKP to RM0.78 (previously RM1.10) based on 12.0x CY24 EPS (previously 13.0x) which is >-1.0SD to the stock’s 5-year average of 18.9x. And given the stock’s narrowed risk-reward potential, we downgrade our recommendation on SKP from Buy to Hold.

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

Source: TA Research - 1 Dec 2023