• Keep BUY and MYR1.95 TP, 14% upside, c.4% FY23F (Mar) yield. SKP Resources’ 1HFY23 results underperformed estimates, on its weaker-than- expected 2QFY23 margin and in view of the delay in commissioning a new production line. That said, the stock is our preferred sector pick, premised on its Customer X-centric client profile, which we believe will be more resilient in view of the challenging global macroeconomic growth ahead.

• 1HFY23 results below estimates. Net profit of MYR84m (+15% YoY) makes up 41% and 46% of our and Street full-year estimates, on the weaker-than-expected 2QFY23 margin. We also note the imminent delay in the commissioning of a new production line. Post results, we cut FY23-25F earnings by 8-14%. Our unchanged TP of MYR1.95 still implies 15x P/E, but we roll over our valuation base year to 2023F from FY23F. The valuation implies a 15% or 2x multiple premium over what we pegged its peer, VS Industry (VSI MK, NEUTRAL, TP: MYR0.85). This is because we believe SKP will be exposed to a relatively lower degree of slowdown risks, given its more resilient Customer X-centric customer profile.

• Results review. YoY, 1HFY23 revenue jumped 21% to MYR1.3bn thanks to higher order demand from its key customer. Meanwhile, a more unfavourable product mix and FX rates crimped its PBT margin by 0.4ppts, and this led to a relatively slower PBT growth of 15% to MYR110m. QoQ, 2QFY23 sales surged by 32% to a record high of MYR735m, driven by robust demand from a key customer and higher production capacity following the arrival of new labour. However, FX loss and start-up costs related to a new production line caused a 0.5ppts slip in PBT margin. As a result, 2QFY23 net profit grew 25% QoQ to MYR47m.

• Outlook. We expect the strong earnings growth momentum to be sustained into 3QFY23F, on seasonal demand and the contribution of a new production line. Margins should also normalise as the FX loss is expected to be reversed, given the cost pass-through mechanism in place and the absence of start-up costs. Meanwhile, SKP’s latest production facility is expected to be completed by early 2023, and estimated to increase its total floor space by 40-50% or 650k sq ft – thereby providing the additional capacity to take on more orders from existing customers. It will also be able to further internalise production by expanding the printed circuit board assembly and battery pack capacity in the new site. The new facilities should also set the stage for SKP to bring in new customers, in order to boost its orderbook and diversify its revenue stream.

• Risks to our recommendation include a delay in the commissioning of the new production facility and a market share loss. As its ESG score is in line with our country median, we applied a 0% premium/discount to our intrinsic value to derive our TP.

Source: RHB Research - 1 Dec 2022