9M18 NP came in line, so was the absence of dividend. We made no changes to our FY18E/FY19E earnings. Since our UP call, the share price has retraced by 16%, presenting a better risk-reward at this level. Meanwhile, orders visibility is still solid; with potential margin accretion from the commencement of in-house PCBA line (which should see fruition in FY19). With an unchanged TP of RM2.05 which offers a decent total upside of 12%, we upgrade it to OP.

Within expectations. The group reported a softer 3Q18 net profit (NP) of RM30.0m (-14% QoQ; -1% YoY), bringing 9M18 NP to RM98.5m (+38% YoY) which made up 73%/71% our/consensus full-year estimates. As expected, no dividend was declared for the quarter under review. Note that the group usually pays its final dividend by end of July/early August; with dividend pay-out of no less than 50% as per its dividend policy. We are expecting the group to pay DPS of 5.5 sen for FY18 based on a pay-out ratio of 51%.

YoY, 9M18 revenue grew by 21% driven by: (i) second tranche of household electrical appliances (floor cleaning) contracts, and (ii) full contribution from the new revolutionary products (beauty tools). Meanwhile, EBIT margin improved by 0.8ppts to 7.8% alongside the subsiding cost pressures (on the absence of last minute hiring of higher cost contract workers in 1Q17 to meet high orders) coupled with the continuous yield improvement on lower wastage. With stable ETR of 24.0%, NP improved by 38% (with NPM of 6.0%). QoQ, 3Q18 revenue dropped by 13% which we believe was dragged by slower ramp-up in its household electrical appliance. Coupled with operational deleveraging, NP dropped by 14%.

Orders visibility still solid; with potential margin enhancement from vertical integration. We understand that the blip in 3Q18 was a non- recurring event; with production already seeing normalisation now. Meanwhile, the orders for its main revenue drivers- the Beauty products and Household products are still intact. This will contribute at least RM1.7b-RM2.0b in FY18-FY19 that will anchor a 2-year revenue CAGR of 16%. Further potential catalyst in the medium term would be from its potentially better profitability, which could be reaped from its new PCBA services. Note that currently, the group is sourcing the PCB parts from other EMS players. To further improve its profitability as well as its capability as a complete integrated ‘one-stop’ EMS service provider, the group has on April 2017 announced its long-term strategic plans to expand into PCBA and other EMS related services. We understand that the PBCA set-up will be up and running in 1QCY18, which will utilise 25% of space in its new plant. We are currently assuming its CNP margins to be at 5.9%/6.4% in FY18/FY19 which are broadly in line with other EMS players with in-house PCBA capability. It is also noteworthy that with more complete integrated one-stop EMS services, this will enhance the group’s position in winning more contracts from its major customers.

Upgrade to OUTPERFORM with an unchanged TP of RM2.05. Since our downgrade to UP in our sector report (dated on 5th January 2018), the share price has retraced 16%, presenting a better risk-reward at this level. With an unchanged TP of RM2.05 which is still based on a targeted PER of 15.0x, a valuation which is in line with its closest peer- VS, we upgrade SKPRES to OUTPERFORM. Besides the decent total upside of 12%, (i) the solid 2-year CNP of 27%, (ii) stable earnings visibility, (iii) decent dividend yield of 3.7% as well as the (iv) cost pass through mechanism (which sheltered the group from the currency fluctuations) are the stabilizing factors that are appealing to investors in the technology space.

Source: Kenanga Research - 23 Feb 2018