Review

• SKP Resources reported their 1HFY17 results, with net profit at RM41.0mn (+24.5% QoQ, +12.8% YoY). This was within ours, but below consensus estimates at 37.0% and 32.7% respectively. We expect earnings to pick up in the second half. No dividends were announced.

• Top line grew faster than bottom line. Revenue increased 42.4% QoQ, on increased contributions from higher cordless vacuum cleaners and electronic consumer product (ECP) volumes. Costs, however, remained high as new foreign workers arrived only towards the end of the quarter. EBITDA margins decreased 1.5pp to 7.7%. We expect margins to normalise towards the second half, which should also be driven by the ramp up of its 2nd and 3rd ECP lines.

Impact

• Leave our earnings estimates unchanged.

Outlook

• Having solved its labour issues, new foreign workers have progressively arrived since September 2016 – reducing its dependence on high costs contract workers. As a result, we expect margins to normalise in the coming quarters.

• Near term earnings driver will be the fulfilment of its ECP contract, valued at RM500mn/annum. Ahead of schedule, its third ECP line has been completed and is already up and running. This should contribute positively to results from the next quarter onwards.

• With the installation of its 3rd line, we estimate that 35% of capacity at its new factory will be utilised. We remain positive on future prospects, due to the possibility that more contracts will be secured in the future. There are ample of opportunities, as its UK customer targets to roll out 100 new products over the next few years.

Valuation

• Our TP for SKP Resources is maintained at RM1.75/share – based on a PE of 14x and CY17 EPS of 12.7sen. BUY. Driven by its new factory, we like the stock for its strong earnings growth potential with an estimated three year CAGR of 36.7% YoY. Expected yields are also attractive at between 3.4- 6.3%.

Source: TA Research - 29 Nov 2016