SKP bounces back with stronger order book

SKP Resources Bhd
(June 26, 52.5 sen)
Maintain trading buy with target price of 57 sen:
SKP faced a challenging financial year 2014 ended March 31 (FY14) when earnings took a dent due to weak orders from its main customer Dyson, a British technology company that designs household appliances.

SKP also faced margin compression from the implementation of the minimum wage policy as well as the hike in electricity tariffs.

Despite these challenges, the group made a comeback in the fourth quarter (4QFY14), which was underpinned by its stronger order book from its existing customer as well as an increase in production capacity to boost its earnings.

The group recorded a strong earnings jump in 4QFY14 with its net profit surging 17% year-on-year (y-o-y) to RM8.2 million, thanks to the higher order book. Meanwhile, we also understand that its production capacity utilisation rate has returned to the comfortable 75% level from its low of 60% earlier in FY14.

SKP is currently completing the construction of a new factory on a 2ha plot of land in Senai, Johor, which was acquired for RM6.8 million. The new plant is expected to be ready in October 2014 and will achieve full-scale operations by FY17.  

As one of the key original equipment manufacturers for Dyson over the past five years, SKP secured another contract from Dyson recently to manufacture two new product lines (for vacuum cleaners and fans). SKP’s stronger order book will provide earnings visibility for the next few years.

The new products are next-generation appliances that will be able to fetch higher margins and contribute to the group’s earnings. We understand that a major part of the group’s new plant capacity will cater to the production of the two new products.  

SKP is currently sitting on a net cash of RM93.1 million, translating into 10.3 sen per share or 21.6% of the group’s market capitalisation.

Besides, SKP also has a sizeable retained earnings base of RM130.4 million (versus market cap of RM432 million), suggesting that it is strongly capable of financing its future capital expenditure internally. We believe that the strong balance sheet will continue to lead the group to sail through any unfavourable operational environment in the future. — Kenanga Research, June 26

This article first appeared in The Edge Financial Daily, on June 27, 2014.

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