Sunday, January 23rd, 2022

SKP Resources Sdn Bhd: Expecting resiliency in the face of adversity

The core net profit of RM128.0 million (+71.0 percent yoy) in FY3/21 was in line with expectations. Both revenue and margin expansion drove strong profits growth.

We anticipate the impact of the 60 percent personnel restriction during the lockdown will be manageable and will not result in major productivity losses.

We think that the order outlook remains unchanged.

Earnings for FY21 were in line with forecasts. SKP Resources‘ (SKP) FY21 core net profit of RM128.0m (+71.0 percent yoy) was within our/Bloomberg consensus predictions at 102 percent /101 percent. Despite brief plant shutdowns in 1QFY21 due to the execution of the movement control order, revenue increased by 25.0 percent yoy in FY21, mostly owing to greater orders from its primary customer (MCO). SKP benefited from stronger contribution from its printed circuit board assembly (PCBA) operations, which contributed to the 2.2 percent -pts EBITDA margin growth in FY21, in addition to superior economies of scale.

In 4QFY21, earnings were down qoq mostly owing to a temporary stoppage.

In 4QFY21, SKP had a 37.6% drop in sales and a 30.3 percent drop in core net profit on a year-over-year basis. This was mostly due to I a precautionary shutdown of its Johor Bahru operations from January 16 to January 29, 2021 to conduct Covid-19 screening of its personnel, and ii) a seasonally poorer quarter due to fewer working days and Chinese New Year holidays. Despite this, EBITDA margins increased by 1.3 percentage points year over year, owing to a larger contribution from its PCBA businesses.

During the lockdown, productivity is unlikely to suffer a significant drop.

While the nationwide lockdown, which will take effect on June 1, 2021, will force SKP to operate at a maximum of 60% of its workforce capacity, we believe the productivity loss will be minimal because we believe SKP will be able to optimize its shifts to cater to higher demand product lines during the two-week period. We gather that SKP stocked up on inventory in 4QFY21 to offset the risk of supply shortages from suppliers, and that inventory value was 16 percent higher on a year-over-year basis.

On housekeeping considerations, we make minor adjustments to our FY22-23F predictions and introduce FY24F predictions. We keep our Add call on the stock, but with a slightly revised TP of

2.18 RM This is still based on the 19x CY22F P/E, which is +1 standard deviation over its 5-year mean P/E. The premium is intended to reflect the company’s solid order flow outlook as well as the possibility of further margin improvement from larger contributions from its PCBA activities.

New product model wins from a key customer and better-than-expected profitability are two important re-rating catalysts.

A sudden slowdown in order flows from its important customer, a lengthy period of lockdowns and reduced staff capacity, and greater operational costs are all potential downside concerns.

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