UOB Kay Hian Research sees SKP Resources earnings surging in 2H

SKP Resources factory

KUALA LUMPUR: UOB Kay Hian Malaysia Research expects SKP Resources’ earnings in the second half of its financial year ending March 31, 2017 (FY17) to pick up due to higher sales driven by production ramp-up of a recently-awarded beauty product by its major customer.

The research house said on Tuesday its expects margin recovery from the completion of recruitment of foreign labour from September 2016 till November 16, whereby SKP will not need to rely on contracts workers who incur higher costs and have lower productivity.

It deemed SKP Resources’ 2QFY17 results within expectations, despite 1HFY17 core net profit of RM40.5mil making up only 34% and 32% of its and consensus’ FY17 forecasts respectively. 

UOB Kay Hian Research said the 2QFY17 sales rose by 74.7% on-year driven mainly by both vacuum cleaner and beauty product contracts from its major customer.

However, its core net profit rose by only 28.2% on-year due to: a) hiring of contract workers who incur higher costs due to labour constraint after the government’s decision to freeze the hiring of foreign labour early this year, and b) teething problems experienced in new production lines which were exacerbated by the lower productivity of these contract workers.

To recap, SKP faced labour shortage due to the ban on foreign worker recruitment by the government this year. The company then resorted to hiring contract workerswho incur higher costs and have lower productivity.

In order to optimise its constrained number of labour for the manufacture of the beauty product, the RM400mil per annum contract of vacuum cleaners that it has secured in May 2015 has been discontinued in July 2016. The beauty product contract is worth RM500mil per annnum and we gather that reception for the product since its launch has been encouraging thus far.

“We gather that SKP will be expanding an additional assembly line each for the vacuum cleaner and beauty product models amounting to approximately RM500m sales for FY18. We would like to highlight that our earnings forecast have taken into account the contribution from the production ramp-up of both models.

“No change to our FY17-19 earnings forecasts of RM119.7mil/RM148.1mil/RM156.1mil respectively. Maintain Hold with a higher target price of RM1.35 (from RM1.30), after we roll forward our base valuation to 2018 from 2017, pegged to an unchanged price-to-earnings (PE) of 11 times. Entry price: RM1.20,” it said.