Gaining New Fans Following its weak earnings in FY14, SKP, an integrated plastic manufacturer with mechanical-electronics assembly capability, is poised to make a strong recovery and resume its growth trend from FY15 onwards. Its recovery is underpinned by clients’ growing orders for existing capacity as well as commencement of new production lines that cater to a new product range. Being a small-cap company with solid earnings growth prospects, prospective dividend yield of 6% and close to RM100m cash (31% market cap) in its coffer, SKP deserves to trade at 10x 2015F PE. Initiate coverage with a BUY and a target price of RM0.55. INVESTMENT HIGHLIGHTS New product cycle fanning an earnings CAGR of 26% in FY14-17F. After soft volume orders in FY14 ahead of significant product upgrade, SKP is on track to resume its growth trend in FY15, particularly post-capacity expansion in 2HFY15. We expect SKP to achieve RM40m-59m in FY15-17F vs RM29m in FY14F. The earnings leap in FY15-17F is mainly attributable to the increasing orders from its key customer, Dyson. SKP will be ramping up its capacity by 75% in stages and the facilities will be mainly catered for Dyson’s product segments. The rising order will also be partly due to client’s introduction of a new product and growing demand for existing products. Becoming an assembly contractor of choice in the E&E space. SKP’s Europe- and Japan-based multinational IDMs of consumer electronics have increasingly recognised SKP’s production efficiency, growing engineering competency and financial strength. This has resulted in it securing more contracts. Strong balance sheet and cash flow. SKP’s coffer is backed with about RM100m net cash (31% of market cap). Assuming SKP forks out RM50m capex for expansion and maintains a 50% dividend payout policy, we estimate that SKP’s cash level will still remain healthy at RM92m by FY16. This reflects the company’s healthy cash flows and efficiency in generating quick paybacks. Attractive dividend yield of 6-8% expected in FY15-16F, assuming a 50% dividend payout policy. Initiate with BUY and a target price of RM0.55 based on 10x 2015F PE. Our valuation is reasonable as it implies an effective target PE of 5.2x after stripping out its estimated FY15F net cash (9sen/share). Its present about 10% discount to other local manufacturing companies’ PEs makes it compelling. From EV/EBITDA valuation perspective, SKP’s 3.9x FY15F is much lower than that for the others’ average of 7.0x.
To beef up capacity by 75% in stages, starting from 2HFY15. SKP recently announced an acquisition of a 2ha land in Senai, Johor for RM6.8m to build a new factory. This expansion will add additional 75% of capacity but full operation will only come on-stream in FY18. Assuming the new capacity is coming in evenly over FY15-18, this would mean that SKP will add over 20% of new capacity p.a. over the next three years. We understand that the new production could be started as soon as 3QFY15. We estimate that the capex could be in the range of RM40m-50m. We view that this significant expansion plan would not stretch the company’s balance sheet as it has a strong net cash position of RM98m as at 3QFY14. Where will the demand come from? In addition to the minimum wage policy, SKP’s gradually declining earnings trend over the last three quarters was partly due to the weak orders from its key customers. However, given that one of its key clients will be launching a new product, we believe that this could revive orders moving forward as an introduction of new product will typically spur consumers’ demand. Furthermore, we are hopeful that SKP would see more demand from its other existing clients as well, rising alongside a recovery in global economic activities, and this could boost demand for consumer electronics products such as televisions. Going big into Dyson’s other product segment. SKP’s remarkable growth in FY10-13 was mainly attributed to its maiden turnkey contract for Dyson’s vacuum cleaner product segment. We understand that SKP has secured a similar type of contract for Dyson’s other product segment and majority of SKP’s new plant’s capacity, which will start operating in 3QFY15, will cater specially to this product. While we acknowledge that SKP has a tight timeline in setting up its new facilities, we believe that SKP could be able to deliver on schedule, given its experience in setting up new production facilities. Assuming a total capex of RM40m-50m, we estimate that the payback period would be four-five years’ time. Estimated earnings CAGR of 26% in FY14-17F. We are estimating SKP to achieve RM29m, RM40m, RM52m and RM59m in FY14F-17F respectively. In summary, the earnings leap in FY15F (+36% yoy) will be underpinned by: a) stronger order volume for existing capacity, due to client’s introduction of a new product and rising demands for existing products and b) 4-6 months contribution from its new plant’s operations. Meanwhile, earnings growth in FY16-17F (+32% and +13% yoy respectively) will be mainly due to the new plant’s production facilities coming on-stream. Strong balance sheet. SKP has zero debt and is sitting on a cash pile of RM98m (11.5sen/share), equivalent to 31% of its market capitalisation. Assuming SKP pays out 50% of its net profit as dividend and forks out RM50m for expansion purposes in FY15-16F, we estimate that SKP’s cash level would reach RM92m by FY16F. Decent dividend yield of 6-8% in FY15-16F. Backed by its strong cash flow, SKP has consistently paid out 46-50% of its earnings over the last three years. Assuming a 50% payout ratio, we estimate that SKP will offer a lucrative dividend yield of 5.9% and 7.8% for FY15 and FY16, respectively. In addition, despite the massive capacity expansion in the pipeline, we do not discount the possibility that SKP would dish out a special dividend to reward shareholders as this small-cap company owns RM48m- 58m cash (5.3-6.4sen/share) in its coffer, post an estimated RM40m-50m capex.
VALUATION Initiate coverage with BUY and a target price of RM0.55, deriving from 10x FY15F PE. Our target price implies an upside of 46.7% from its current share price. FIGURE 6: VALUATION METHODOLOGY Division (RMm) PE (x) Value (RMm) 2015F earnings 49.1 10 491 Share base 900.0 TP per share (RM) 0.55 Source: UOB Kay Hian 10x 2015PE is reasonable. Our target 2015PE of 10x implies a 19% discount to SKP’s listed peers’ weighted average PE of 12.4x in 2015, based on consensus estimates. Bursa-listed V.S Industry is SKP’s most comparable peer as it is also one of Dyson’s contract manufacturers although in different product category. However, we opine that SKP has competitive edge over its peers as the company’s strong financial strength (net cash position vs VS Industry’s 0.4x net gearing) enables it to expand its production capacity easily to cater clients’ orders. Local manufacturing companies are trading at similar valuation. On a broader basis, we include local manufacturing companies with market cap below RM500m and earnings base of RM30m-60m for comparison purposes. These companies are trading at weighted average 2014PE of 9.9x and 2015F PE of 9.6x, justifying our 10x PE valuation as being reasonable. From EV/EBITDA valuation perspective, SKP’s 3.9x FY15F is much lower than that for the others’ average of 7.0x. Our target price suggests 5.2x cash-adjusted 2015PE. Excluding our estimated FY15F net cash (9sen/share) from the market price implies that SKP is currently trading at undemanding 5.2x 2015F PE. Our target price excludes the potential dilution arising from SKP’s warrants as it is currently out of money and is trading at a high premium of 41.3%. As such, we see no reason for warrant holders to convert their warrants anytime soon. However, if we assume that the warrants are fully converted, our target price would be RM0.53, after including the cash proceeds from warrants.
FINANCIAL HIGHLIGHTS Weak FY14 but strong recovery from FY15 onwards. For 9MFY14, SKP recorded revenue of RM302m (-26% yoy) and net profit of RM22m (-35% yoy). The weak result was mainly due to reduced sales order and higher cost as a result of the minimum wage policy. We expect 4QFY14 to see RM8m in net profit (+38% qoq, +6% yoy). The significant qoq improvement is mainly due to the higher sales order, particularly from Dyson. SKP’s utilization rate has recovered from a low of 60% in 3QFY14 to about 75-80%. On a full year basis, we estimate that SKP will only achieve RM29m net profit (-26% yoy) in FY14. On the other hand, we expect a strong recovery for SKP in FY15-17. We estimate SKP to achieve net profit of RM40m, RM52m and Rm59m in FY15-17, representing CAGR of 22%. Expecting yoy margin improvement due to favourable product-mix. For 9MFY14, SKP recorded EBIT margin of 9.2%, a yoy 3.8% contraction. The lower margin was mainly due to the impact of minimum wage policy as well as the higher proportion of sales for low-margin products (sub-assembly products). In FY15, margin is expected to improve due to better product mix. The sales order growth will come mainly from Dyson’s products, which require fully-integrated manufacturing solutions that granted better margin. We estimate SKP’s EBIT margin to range between 10-11% in FY15-17F. However, we believe SKP is unlikely to enjoy high EBIT margin of more than 12%, which was registered in the period of FY11-13, due to inflation of labour and electricity costs. Intact working capital management. SKP’s cash conversion cycle has been well managed between 38-47 days in FY11-13. We view that this range is sustainable as: a) SKP has managed to consistently control its inventory/COGS ratio in the range of 7-9% over the past five years, and b) It is unlikely to see a significant spike in receivable turnover days, given its clients’ strong profile. In addition, SKP’s net cash flows have been in a positive position since 2008 and we foresee this trend to continue going forward, with the exception of FY15F due to non-recurring major expansion capex. FIGURE 9: NET PROFIT AND GROWTH TRENDS Source: SKP, UOB Kay Hian FIGURE 10: EBIT MARGIN TREND
SKP Resources (SKP MK) Technical Buy Last price: RM0.375 Resistance: RM0.395, RM0.425 Support: RM0.335 BUY with a target price of RM0.425. SKP’s share price has retraced, consolidated and recovered gradually, forming a bullish reversal pattern of “cup and handle” over the last 6 months. Last Friday’s breakout to close above the neckline of RM0.365 was backed by a much higher trading volume of 14.1m shares (vs 20- day average of 2.9m) that validated the breakout. The bullish crossover in both MACD and Stochastic, which signals a strong momentum ahead, should in our view push the share price higher. Moving forward, we peg our near-term upside target at RM0.425 using X to X projection based on the “cup and handle” pattern.
good reasoning! too bad tat no mkt on tuesday. ready to whack with my 6-digit selling from lbalum & gadang. any concern on its dependence on dyson? dyson products r quite pricey while china economy is slowing down?
I also hope it could go lower tomorrow. Just sold off my presbhd and have big bullets to shoot this counter. But please take note that this counter will fly next Monday onwards.
SKP Resources (SKPRES) – Not Rated------------KENANGA
On previous trading day, SKPRES climbed 1.0 sen (+2.67%) to settle at RM0.38 with high trading volume. From a technical perspective, SKPRES has been trading in a sideway trend channel for the past 2.5 years. Key indicators (MACD, Stochastic and RSI) are currently hooking upwards, suggesting strong buying interest is building up. Based on this bullish bias, we believe that SKPRES could retest its resistance level of RM0.40 in the near-term. Meanwhile, we suggest traders to look for a resistance breakout moving forward. Shall the RM0.40 resistance be taken out, we believe SKPRES could stage a rally towards the ‘Flagpole’ measurement objective of RM0.52. Outlook Bullish Key Resistance level RM0.45 (R1) RM0.49 (R2) RM0.52 (R3) Key Support level RM0.34 (S1) RM0.30 (S2) RM0.27 (S3) Strategy Not Rated Current Price RM0.38
About the stock: Name : SKP Resources Bhd Bursa Code : SKPRES CAT Code : 7155 Market Cap : 346.5 52 Week High/Low : 0.40/0.30 3-m Avg. Daily Vol. : 1,807,319.0 Free Float (%) : 49.1% Beta vs. KLCI : 0.7
On previous trading day, SKPRES climbed 1.0 sen (+2.67%) to settle at RM0.38 with high trading volume. From a technical perspective, SKPRES has been trading in a sideway trend channel for the past 2.5 years. Key indicators (MACD, Stochastic and RSI) are currently hooking upwards, suggesting strong buying interest is building up. Based on this bullish bias, we believe that SKPRES could retest its resistance level of RM0.40 in the near-term. Meanwhile, we suggest traders to look for a resistance breakout moving forward. Shall the RM0.40 resistance be taken out, we believe SKPRES could stage a rally towards the ‘Flagpole’ measurement objective of RM0.52.
Ahhh.. Moved too fast.. No chance to collect more.. Was expecting it to touch 0.4 next week.. Next week this counter gonna run wild.. Sit tight and watch it fly..
AhJee, despite sitting on solid returns, I will hold the stock as it offers 6-7% dividend yield. Personally I believe the stock still has legs to go purely based on valuation grounds.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
chiongster1234
3,513 posts
Posted by chiongster1234 > 2014-05-12 18:40 | Report Abuse
wau..solid bar with new high prices?