CGS-CIMB lowered its target price and earnings per share (EPS) for SKP Resources Bhd to account for weaker revenue trend ahead as it spotted potential softening of orders from the group’s main customer.
In its Company Note today (Feb 15), it said SKP’s key customer contributes 75% to 80% of its annual revenues in FY21 to FY23.
“We draw from our channel checks that order visibility has dwindled noticeably on the back of inventory adjustments and weaker-than-expected end-consumer sentiment.
“As such, the decline in the revenue from the key customer may be worse-than-expected for FY24F,” it said.
Given this development, the research house cuts its FY24 to FY26F EPS by 20.2 to 25.8% as it assume a steeper revenue decline of 30% from the key customer in FY24F, from 16% previously.
“We believe order visibility may pick up by FY3/25F with the launch of new household care products that may spur consumer spending positively. Overall, we expect an EPS decline of 40.2% in FY24F, before rebounding by 25.4% and 18.3% in FY25 and 26F, respectively.”
However, CGS-CIMB reiterated its ADD call for SKP as it believes that its near-term weakness is likely priced in for the stock and lower TP of RM0.92 as valuations appear attractive.
“The stock is currently trading at below its 8-year average on both price-earning ratio (P/E) and price to book value ratio (P/BV) multiples as well as below industry peer average of 15.8x.
“With the stock down 58% in the past 12 months, we think downside EPS risks have more than reflected in the valuations.
“The P/E multiple implied in our TP of 13.4x is lower than VS Industry Bhd’s 16x, which reflects SKP’s large single-customer concentration risk despite offering higher return-on-equities (ROEs).
“We also view its share price could be supported by decent dividend yields of 4 to 5% in FY24 to FY26F, based on 50% payout ratio.”
The stockbroking firm said new project wins from new customers could be a positive catalyst.
“Diversification to new customers is also a key catalyst for SKP in our view. We understand the group has a readily available floor production capacity of 650,000 sq ft in its new facility in Senai, Johor to cater for new projects.
“While details are relatively scant at this juncture, we think group may likely benefit from manufacturers’ relocation and diversification from China to Malaysia, with key advantages of having strong manufacturing track record, mature supply chain and competitive labor cost.”
The upside catalysts for its call include stronger-than-expected sales coming from customer diversification initiatives, growing market share in the major customer while downside risks are loss of market share from the major customer to other CMs, prolonged customer sentiment weakness and rising labor cost.
