Thesis

SKP is a simple manufacturing business that will grow earnings by 25-40% when it opens up the new factory early in 2014. SKP is currently trading at 1/3^rd of the value of peers so there is a sufficient margin of safety in the current valuation with potential upside when the new factory open.

Variant View / Mitigating factors

• Dyson (of vacuum, hand dryer, and blade-less fan fame) represents 55% of SKP’s revenues, which presents a significant risk to earnings if Dyson decided to reduce use another contract manufacturer.
  • Dyson has been working with SKP since it moved to Malaysia in 2002. In 2009, SKPRES was able to ascend the value chain and become a full-assembly manufacturer from sub-assembly.
    • Channel checks suggest that there are no issues with the current manufacturing arrangement.
  • Management is spending RM30m to increase production capacity by 40% within the next year.
    • This is largely to cater for contracts that have already been secured from existing clients. The plant should be completed by 2H2013 but benefits won’t hit the bottom line until production is ramped up in 1Q2014.

Introduction

SKP was incorporated in Malaysia on 23 August 2000 and is involved with the manufacturing of plastic parts and components, precision mould making, the sub-assembly of electronic and electrical equipment and other secondary processes. Each of the subsidiaries in the SKP Group is involved in the manufacturing but specialise in distinct products.

SKP Company Structure

SKP – Syarikat Sin Kwang Plastic Industries – Manufacturing plastic parts and components, sub-assembly and other secondary processes.

GHI – Goodhart Industries – Manufacturing of precision and engineering plastic parts and components, sub-assembly process and other secondary processes.

GHL – Goodhart Land – Letting of property and property holding.

GHT – Goodhart Technology – Manufacturing metal moulds.

Customers

While all Dyson production was initially in England, it moved to Malaysia in 2002. Currently, Dyson represent 55% of the group’s revenues and this could increase as Dyson expands their distribution into China.

SKP also has a number of other, premier customers, see below.

Manufacturing operations

SKPRES has four manufacturing operations strategically located in Johor – Three in Batu Pahat and one in Johor Bahru, totaling ~655,840sqft. Management is in the process of spending RM30m over the next two years to build a new plant, which will increase manufacturing capacity by 40%. Production at the plant should start at the end of 1Q2014 and should be evident in the 1H2014, while I expect expenses to increase in 2H2013 as the company increases the employee base to prepare for the new facility.

Operating Metrics

The operating margins have been improving since 2009 as they’ve picked up more work from Dyson (which means it could easily erode if Dyson disappears).Typically, I like to see a ROE >20%, which it is albeit with a lot of variation. I would have liked to see some more consistency with the operating ratios but that could only come with a business that has a higher value add product and less customer concentration.

Main competitors

SKP has two main competitors in the region:

• V.S. Industry – Plastic injection moulding, with operations in Malaysia, Indonesia, Vietnam and China.
• Meiban Group – Plastic injection moulding, with operations in Singapore, Malaysia and China.

Management

The management and board is heavily dependent on Dato Gan Kim Huat. The 65 year old Managing Director and Executive Chairman of SKPRES has over 30 years of experience in plastics injection moulding and is a well known entrepreneur in the local plastics industry. His son, Gan Poh San, studied at the Nisseu Plastics School in Japan and is presently working as an Executive Director at SKPRES. His sister, Gan Poh Ling, is a Non-Independent Non-Executive Director of SKPRES.

Shareholders

Kim Huat has a majority of the outstanding shares (57.5%) and Gan Poh San holds a further 19.3%, leaving less than 20% for free float.

Over the past year Renown and Kim Huat have been selling down their holdings. Suggesting they don’t value the company at more than 40.0RM at the moment.

Source: Bloomberg

Valuation

Using a back-of-the-envelope approach, and assuming that the RM30m addition of PPE is able to generate the same EBITDA margins – i.e. giving SKP no benefit for the synergies that it would receive from splitting the corporate overhead across a larger operating base – it would give SKP a 25% boost in earnings.

SKP – Valuation

Applying this to the current set of CompCos, SKP is trading at a 70.8% discount to peers. Some of this discount is justified by the fact that a majority of the shares are tightly held by the controlling family and there is unlikely to be any corporate catalysts to cause a rerating. I believe that a 40.0% discount is appropriate for SKP to take into account the controlling family’s position.

I believe the company is worth RM0.57 based on the above assumptions and the new factory opening.

SKP – Valuation

Another way to play

In 2012, SKP resources had a bonus issue of 300 new shares, issuing one bonus share for every two held. In conjunction there was also an issue of warrants, the company issued 1 warrant for every 5 shares held. The warrants are American and expire on the 27 June 2017, with escalating exercise prices. The warrants can be exercised for RM0.45 up until 27 June 2014, etc (see below).

They trade lightly with about US$1k changing hands each day and don’t have any claim on the dividends. In this situation, I’d prefer to play SKP via the underlying because of the dividends (7% dividend yield in 2012).

Disclosure: This is not meant to be interpreted as investment advice. If you’re considering investing, please do your own due diligence. I do not currently have a position in SKP.