• Maintain BUY and MYR1.31 TP, 10% upside and c.4% FY25F (Mar) yield. We visited EMS companies under our coverage in Johor and came back feeling positive on the near-term sector earnings prospectus and learnt that customer diversification is gathering pace. We continue to like SKP Resources as a proxy to capitalise on the recovery of global demand for consumer electronics and opportunities arising from the trade war diversion.

• Key takeaways from the trip. We visited the production facilities of both EMS companies and observed that the volumes are picking up thanks to the normalisation of Customer X’s orders from the inventory adjustments in late- 2023, and in approaching the favourable year-end seasonality. Meanwhile, we saw ample floor space capacity available for both due to the capacity expansion in the earlier years and lack of significant new demand by key customers. That said, both managements have expressed optimism in securing new customers by year-end to fill up the spare capacity. This is in view of the strong interests and enquiries from multinational corps (MNCs) looking to diversify their manufacturing sources away from China.

• FY25F to reflect order recovery. Following a 33% decline in FY24 net profit on the back of a dip in sales volumes, we expect SKP to stage an earnings rebound in FY25F (+23%) – primarily premised on the normalisation of Customer X’s order demand. We expect 1QFY25F to get off to a good start with an estimated c.20% YoY topline growth and anticipate the momentum to accelerate further into 2QFY25F for the key customers to capture the year-end festive demand. Post-visit, we make no changes to our earnings forecasts and TP of MYR1.31 (inclusive of a 6% ESG discount) which is based on 15x 2025F P/E. The valuation is at +1.5SD over the stock’s 5-year mean and represents a discount over close peer VS Industry (VSI MK, BUY, TP: MYR1.49) warranted by VSI’s larger market capitalisation.

• Kick-starting new revenue stream. We understand that SKP is scheduled to start the production lines of the two new customers it secured earlier by Oct 2024. 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. We were shown the preparation work and floor space allocated to this customer in its Plant 5 during the visit. Management guided a 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 production lines.

Source: RHB Research - 3 Jul 2024