• Maintain NEUTRAL, with new TP of MYR0.95 from MYR1.43, 7% downside. FY23 (Mar) results disappointed as the margin impact from slower sales orders was more severe than expected. Essentially, the current valuation may have largely priced in the challenging immediate term outlook. As we do not assume a deep global recession in our base case, the downside risk of a further order cut is unlikely. SKP Resources is well positioned to benefit from a potential rebound judging from its established track record and relationship with key customers.

• FY23 results were below expectations. Core net profit of MYR145m (-12% YoY) met only 94% and 95% of ours and consensus’ forecasts. The negative deviation could be attributed to severe-than-expected margin compression dragged by the lower production throughput. Post results, we cut FY24-25F earnings by 28% and 11% and roll out FY26F earnings (+18% YoY). Correspondingly, our TP drops to MYR0.95 as we incorporate the revised ESG score. The TP implies 13x FY24F P/E, close to its 5-year mean and in line with the valuation ascribed to peer VS Industry (VSI MK, NEUTRAL, TP: MYR0.84).

• Results review. YoY, FY23 revenue grew 9% to MYR2.5bn, driven by higher orders from key customers following the economy reopening whilst FY22 was a low base affected by supply chain disruptions and worker shortages. FY23 PBT dipped 16% to MYR182m, dragged by start-up and labour costs for new production lines. QoQ, 4QFY23 revenue fell 32% to MYR500m on account of a toned down order demand from a key customer as well as softer seasonality (Lunar New Year break and short February working month). The drop in volume led to a significant margin erosion as a result of diseconomies of scale and negative operating leverage, which explains the sharp 51% QoQ fall in core net profit to MYR20m.

• Outlook. Near-term outlook is unpromising, taking into account the lacklustre orders from key customers that could be taking a cautious stance on global demand. This has also led to the delays of new product launches and SKP having to absorb the start-up costs without sales contribution. That said, we anticipate a gradual recovery towards 2HFY24F assuming better clarity on global demand and pick-up in seasonality. By then, earnings should stage a rebound with a normalisation of production volume and further boosted by the new product launches. Risks to our recommendation include better/worse-than-expected global economy growth, and higher/lower-than-expected market share.

• ESG framework update. As there is now a greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% of the E pillar, followed by 25% each of the S and G pillars. Further details are in our 2 Mar 2023 thematic research note titled Envisioning a Better Future.

Source: RHB Research -31 May 2023