• Maintain BUY and TP of MYR1.31, 24% upside and c.4% FY25F (Mar) yield. SKP Resources’ 1QFY25 results met expectations on the normalisation of Customer X’s orders and steady profit margin driven by cost optimisation initiatives. Earnings momentum should accelerate sequentially driven by inventory build-up in preparation for the year-end festive demand. We continue to like SKP as a proxy to capitalise on the recovery of global demand for consumer electronics and opportunities arising from the trade war diversion.

• SKP’s 1QFY25 results were in line with expectations. Net profit of MYR28m (+31%) accounted for 24% of our and consensus forecasts. Post-results, we make no changes to our earnings forecasts and TP of MYR1.31 (inclusive of a 6% ESG discount) which is based on a 15x 2025F P/E. The valuation is at +1.5SD from the stock’s 5-year mean and represents a discount over close peer VS Industry (VSI MK, BUY, TP: MYR 1.49), warranted by the latter’s larger market capitalisation.

• Results review. YoY, 1QFY25 revenue rose 17% to MYR506m as Customer X’s orders normalised from a low base. Notwithstanding the 0.4 ppt slippage in GPM on higher production costs, operating margin expanded by 0.9 ppt thanks to lesser outsourced jobs to subcontractors and other cost optimisation efforts to enhance efficiency. As a result, 1QFY25 PBT surged 33% to MYR37m. QoQ, 1QFY25 revenue was 10% higher driven by a pick- up in seasonal demand. Consequently, the higher throughput and a more favourable product mix propelled a healthy GPM expansion of 2.7ppts to 14.3%. Correspondingly, 1QFY25 net profit jumped 15% QoQ to MYR28m.

• Outlook. We expect the positive earnings momentum to accelerate in 2QFY25F on favourable year-end seasonality thereby anchoring the earnings recovery we are expecting in FY25F. This will be largely underpinned by the normalisation of Customer X’s orders from the inventory adjustments in 2023. Meanwhile, SKP is scheduled to start by Oct 2024 the production lines of two new customers it secured earlier. Whilst the earnings contribution may be immaterial in FY25F, a smooth ramp-up of the US-based customer could lead to a more significant order volume in FY26F. Management guided for sales value of MYR100m in the first year and the potential of the value doubling in the second year. In addition, talks are ongoing with several potential new customers and SKP is confident of onboarding at least one by end-2024.

• Risks to our recommendation include significant loss of market share and major delays in the start-up of the production line.

Source: RHB Research - 27 Aug 2024