SKP Resources (SKP) saw another sequentially stronger quarter with a 2QFY24 net profit of RM27.7m (-41.8% YoY, +25.4% QoQ), though not fully recovering to levels seen last year with near-term demand continuing to be impacted by tighter monetary conditions and likely shifts in consumer preference toward staples. Cumulative 1HFY24 net profit of RM48.7m (-41.8% YoY) is below estimates at 40% of our full-year numbers and 43% of consensus. While the current calendar quarter is typically a seasonally stronger one, there are growing indications that sales may not be as robust as initially anticipated. We take a decidedly conservative view and slash FY24-FY26 net profit estimates by ~18% on average to account for weaker demand ahead. While the share price has been on a disappointing downward trajectory, we continue to like the long-term growth prospects of SKP. We now see more notable earnings recovery in lateFY25 however, on more robust consumption spending amid less-tight monetary conditions. Given the subdued near-term earnings outlook, we lower our earnings multiple to 12x (15x previously), which sees our PE-derived target price also revised to RM0.88 (RM1.34 previously) on account of earnings cut as well. Our call is trimmed to Trading Buy.

• 2QFY24 performance. The current quarter saw a sequential improvement in revenue to RM519.9m (+20.5% QoQ), though largely due to seasonality. Net profit margin of 5.2% remains below historical average (~6%) due to lower capacity utilization and higher manpower costs, the latter mostly hired for the robust growth last year (and still retained currently in anticipation of recoveries ahead). The consequently weaker net profit of RM27.7m is reflective of subdued global demand amid tighter monetary conditions, and a likely shift in consumer spending towards staples. Management has indicated that they will embark on cost optimization measures at existing manufacturing facilities amid the current slowdown.

• Prospects still encouraging, but recovery delayed. The Group, like many other discretionary-based consumption-driven companies, has taken a hit from subdued global consumption spending, though this is still expected to normalize in the coming calendar 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, manpower and delivery track record.

Source: PublicInvest Research - 1 Dec 2023