SKP Resources (SKP) reported a sequentially, albeit marginally, stronger quarter with a 1QFY24 net profit of RM21.6m (+7.4% QoQ) due largely to improved margins on better product mix. With it also being a seasonally weaker one, we deem the numbers broadly in line with our and consensus estimates despite it only meeting 18% of full-year numbers as indications are already pointing towards notably better quarters ahead. The drop in revenue and corresponding 41.9% YoY drop in net profit compared to the same period last year is reflective of the effects of subdued global demand resulting from the monetary tightening environment. We continue to like the long-term growth prospects of SKP nonetheless, and still expect to see steadier earnings growth likely in late FY24 onwards, on more robust recoveries in consumption spending, which are already reflected in our earnings estimates. Our numbers are therefore left unchanged. Our Outperform call is retained with a PE-derived target price of RM1.34, based on a 15x multiple to CY24 earnings.

• 1QFY24 performance. The current quarter saw an improvement in profit margins owing to better product mix, though still weaker as compared to historical averages (~6%) due to elevated production costs (mostly manpower) as a result of lower capacity utilization. Revenue of RM431.6m (-22.3% YoY, -13.7% QoQ) continues to reflect subdued global demand, though net margins rose to 5.0% (4QFY23: 4.0%), which contributed to a net profit of RM21.6m (-41.9% YoY, +7.4% QoQ) for the quarter. While the Group has trimmed its current headcount slightly, the numbers remain largely intact as work orders are already starting to resume ahead of the year-end festive holidays. Margins are expected to remain sustainable at the ~6% level going forward due to the Group’s pricing and cost optimization mechanisms.

• Prospects still encouraging. The Group, like many other discretionary based consumption-driven companies, has taken a near-term hit from subdued global consumption spending, though this is still expected to normalize in the coming financial year on the back of an expected easing in monetary tightening. The Group remains primed to benefit from any resumption in order flows with its readily-available capacity and manpower. We are still encouraged by the Group’s multi-year earnings growth prospects, underpinned by the production of new models of a notable key customer.

Source: PublicInvest Research - 28 Aug 2023