SKP Resources saw its earnings delivery in the immediate upcoming quarters, to be driven by the robust order demand from a key customer and the arrival of new labour supply. RHB prefers the stock in the sector – premised on a particular Customer X’s distinctive customer profile, which is deemed to be more resilient in the challenging global macroeconomic environment going forward.
Boosted by the arrival of new foreign labour intake, RHB believes SKP is well positioned to ramp up its production volume to capture the strong seasonal demand towards the year-end, as the company continues to receive overwhelming demand orders from Customer X. With that, RHB anticipate sales to accelerate progressively in 2Q-3QFY23F and exceed the historical high level of MYR726m achieved back in 2QFY20. This, together with the ensuing higher production efficiency on economies of scale, should put it on track to achieve the 24% earnings growth forecasted for FY23. Post-visit, we make no changes to the earnings forecasts.
New capacity to come on stream by early 2023. We managed to get a glimpse of Site 5, which is currently under construction and scheduled to complete by early 2023. The latest production facility is estimated to lift SKP’s total floor space by 40-50% or 650k sq ft, providing the company additional capacity to take on more orders from existing customers.
In addition, it will be able to further internalise its production by expanding the printed circuit board assembly (PCBA) and battery pack capacities in the new site. On top of that, the new facility should also set the stage for SKP to bring in new customers in order to boost orderbook and diversify its revenue stream.
RHB is reducing the TP to MYR1.95 (no ESG adjustments accorded) after ascribing a lower P/E multiple of 15x (from 17x)
to FY23F EPS, in line with the valuation downgrade for the technology sector given the more cautious macroeconomic picture and rising interest rate environment. RHB believes SKP will be exposed to a relatively lower degree of slowdown risks considering Customer X’s distinctive customer profile. Current valuation remains attractive considering the robust earnings growth, insulation from the inflationary environment thanks to the cost-plus model, and decent dividend yield backed by the sturdy balance sheet.
