KUALA LUMPUR: PublicInvest Research is positive on SKP Resources due to the robust earnings growth, inexpensive valuations of 10 to 12 price-to-earnings ratio (PER) strong balance sheet with minimal gearing level.
It said on Monday that further re-rating catalyst include securing new contracts and venturing into new production and expansion of client base.
“We are neutral on the new orders totalling RM2bil from its major customer, Dyson Ltd, announced last Friday. The new orders are seen as replacement contract for the termination of cordless vaccum cleaners, which was secured in May 2015. No change to our earnings forecasts as we have earlier factored in the impact of possible new orders,” it said.
PublicInvest Research reaffirmed its Outperform call with an unchanged target price of RM1.56, ascribing a 15 times multiple to earnings on the back of its robust growth levels in the coming years.
To recap, SKP Resources secured a contract from Dyson Ltd to manufacture Dyson’s new cordless vacuum cleaners for five years totalling RM2bil in May 2015.
However, due to the policy changes in the hiring of foreign workers in Malaysia, the Group has decided to terminate the contract in order to shift the limited labour resources for the production of another new product, which has a similar total contract value.
The new contract will contribute RM500mil a year over the next four years compared to the previous contract, which contributed RM400mil a year over a five-year period.
“Works are already underway, though management remained non-committal on expected contributions and production timelines. Full commercialisation could be the next re-rating catalyst for the stock, though only in 2H CY2017.
“The group has sufficient unused capacity, and more importantly at low holding costs, which could see earnings doubling on full utilisation of its entire product range,” said PublicInvest Research.
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