• Maintain NEUTRAL, with new MYR0.78 TP from MYR0.68, 3% upside. SKP Resources’ 9MFY24 (Mar) results met expectations, with slower order demand continuing to drag topline growth. Current valuation may have priced in the earnings weakness but we opt to maintain our call until a key catalyst emerges. This will include a more visible order outlook and sustainable ramp-up in order volume, as well as a major new contract win to diversify its earnings stream.

• SKP’s 9MFY24 results were within expectations. Net profit of MYR72m (-42% YoY) accounted for 77% of our and consensus forecasts. Post-results, we make no material changes to our earnings forecasts. However, we revise our TP to MYR0.78 after rolling over the valuation base year to FY25F, reflecting an unchanged 12x P/E and 6% ESG discount. This represents a slight discount to close peer VS Industry (VSI MK, NEUTRAL, TP: MYR0.81) to take into account the larger market capitalisation and more diversified customer base.

• Results review. YoY, 9MFY24 revenue dipped 31% to MYR1.4bn, with key customers reducing their orders on the back of soft market conditions. Notwithstanding, SKP managed to optimise its operational efficiency to mitigate the impact of lower volume and maintain 9MFY24 GPM at 13.7% (-0.2ppt). Meanwhile, 9MFY24 opex was 16% lower YoY due to the non- recurrence of upfront costs related to new workers hiring. QoQ, 3QFY24 revenue was 13% lower at MYR453m on cautious customer demand appetite and inventory management. As a result, 3QFY24 net profit declined by 13% to MYR24m.

• Outlook. Based on management guidance, 4QFY24F sales should remain stable QoQ, as opposed to the historical trend where 4Q tends to taper off on seasonality. This could be the result of accommodating a key customer’s inventory adjustment/planning. Whilst the lacklustre order demand has yet to show strong signs of recovery, management observed a marginal uptick in order forecast provided by a key customer. Meanwhile, engagements to secure new customers are in good progress as SKP looks to fill up the capacity of its new plant. We believe any material new contract win could materialise as early as 2H2024. Our FY25F earnings have taken into account the gradual recovery in existing customers’ volume and new contract wins of MYR100m.

• Risks to our recommendation include weaker-than-expected global macroeconomic conditions and a sharp loss in market share.

Source: RHB Research - 27 Feb 2024