Date: September 18, 2024
Broker: UOB Kay Hian
Company Overview
SKP Resources (SKP MK) is involved in the manufacturing of plastic parts and components, contract manufacturing, precision mould making, and the sub-assembly of electronic and electrical equipment. The company is a major player in secondary processes for a variety of industries, including the electrical and electronics sectors.
Stock Information
- Share Price: RM1.09
- Target Price: RM1.36
- Upside Potential: 24.8%
- Market Cap: RM1.70 billion (US$397.9 million)
- Bloomberg Ticker: SKP MK
Growth Outlook and Valuation Reset
SKP Resources experienced a valuation reset due to a combination of non-structural fear factors, including concerns over the yen carry trade unwinding, a potential US recession, and MYR appreciation. These events have pushed SKP’s valuation down to 13.7x FY25 PE, which is 0.5 SD below its five-year mean. This presents a favorable entry point, as the company’s fundamentals remain strong, and it is poised for recovery in the upcoming quarters.
Financial Performance
The company’s 1QFY25 core earnings reached RM28.3 million, marking a 15% qoq and 31% yoy growth. This was driven by the healthy ramp-up in orders from its key customer, enhanced operational efficiency, and inventory replenishment. Looking forward to 2QFY25, SKP is expected to post earnings of RM33-36 million, representing a 17-27% qoq increase.
Key Financials (Forecasts for FY25):
- Revenue: RM2.18 billion
- EBITDA: RM202.4 million
- Net Profit: RM124.8 million
- EPS: 8.0 sen
- Net Profit Margin: 5.7%
- ROE: 13.5%
- Dividend Yield: 4.6%
Operational Efficiencies and New Opportunities
- Healthy Order Load: SKP continues to benefit from the ramp-up in orders from its key customer. Additionally, discussions for new contracts are ongoing, reflecting its strong position in the market.
- Cost Management: The company’s operational efficiency continues to improve, benefiting from cost control and strategic decisions. Forex fluctuations, particularly the USD/MYR rate, are expected to have minimal impact due to natural hedging and a high percentage of MYR-denominated customers (71% of total revenue in FY25).
Vertical Integration and Capacity Expansion
SKP is enhancing its vertical integration capabilities, focusing on expanding its printed circuit board assembly, injection molding, and engineering capabilities. The company has also obtained a certificate of completion and compliance for its new 6.4-acre factory building, adding 50% more capacity.
Key Risks
- Customer Concentration: SKP’s largest customer is expected to account for 75-80% of total sales in FY24-25, which presents a concentration risk.
- Delays in New Production Lines: Delays in the setup and activation of new production lines could negatively impact the company’s growth.
Favorable Forex and Strategic Product Composition
While the USD/MYR exchange rate has reversed sharply from an average of RM4.73/USD in 2Q24 to RM4.28/USD at the time of the report, SKP is well-positioned to mitigate the impacts of currency fluctuations. The company has benefited from natural hedging through USD-denominated purchases, and with 71% of its FY25 revenue denominated in MYR, forex risk is minimized.
Earnings Outlook and Recovery
SKP’s FY25 earnings are expected to show a strong rebound, with an anticipated 29% yoy increase. The company continues to benefit from inventory replenishment and increased order loadings, particularly in its household product segment. New contracts and the company’s strategic investments in capacity expansion should also contribute to this recovery.
Valuation and Recommendation
UOB Kay Hian maintains a BUY recommendation on SKP Resources, with a target price of RM1.36 based on 15x FY25 PE, which is in line with the company’s five-year mean. The stock’s valuation is attractive given its growth trajectory, backed by a solid customer base and expanding operational capabilities.
Environmental, Social, Governance (ESG) Initiatives
- Environmental: SKP Resources is accredited with ISO 9000 and ISO 14000 certifications at the subsidiary level, reflecting its commitment to sustainable management systems.
- Social: The company is actively engaging with specialists to enhance migrant workers’ welfare in Malaysia, demonstrating its commitment to corporate social responsibility.
- Governance: SKP has implemented an Integrity Policy that outlines guidelines for dealing with corruption and bribery, reinforcing its commitment to ethical business practices.
