SKP Resources marked as a safer bet amid the pandemic

The steady global demand cost pass-through mechanism helps to mitigate any rise in production costs for the company, analyst says

by NUR HAZIQAH A MALEK / Pic credit:

SKP Resources Bhd, which is involved in the electronic manufacturing services (EMS), is seen as one of the more resilient companies in a robust industry with upside in capacity despite the current impact of the Covid-19 pandemic lockdowns.

RHB Investment Bank Bhd analyst Soong Wei Siang noted that the steady global demand cost pass-through mechanism should mitigate any rise in production costs, making SKP one of the safer buys for investors.

He added that the company’s upcoming results for the first quarter of 2022 (1Q22) will meet estimates and reflect healthy topline growth.

“These factors, together with new production lines secured earlier, should propel the company’s three-year net profit compound annual growth rate to 13%,” he wrote in a note yesterday.

SKP is scheduled to release its results on Aug 30, and expectations include both quarterly sales and profit to improve significantly year-on-year (YoY) from the low base in 1Q21 that was affected by the first Movement Control Order.

“On a quarter-on-quarter (QoQ) basis, 1Q22 sales should normalise from the seasonally weaker 4Q21, but bottom-line growth could be flattish as 4Q21 earnings incorporated some one-off margin boosters and relatively low effective tax rates.

“We maintain our earnings forecasts, but raise our target price to RM2.05 after rolling over the valuation base year to 2022, from the

FY22 while the ascribed price-to-earnings ratio is unchanged, at 19 times,” he said.

Seasonally, EMS players tend to enjoy increased order volumes during the second half of the calendar year due to year-end festive demand across key markets.

“We understand there is no exception this year, based on the flow of orders the company has received.

“However, the EMS players including SKP may not be able to reap the full benefits this round — especially if lockdown restrictions are to be further extended,” he said.

He added that to minimise the earnings downside, the research house believes SKP would be focused on making the best out of its restricted workforce capacity, managing supply chain disruptions and protecting its workers from pandemic-related risks via the tight implementation of standard operating procedures and vaccinations.

“Notwithstanding the near-term challenges, we believe SKP’s growth prospects and outlook remain promising.

“Apart from the abovementioned robust order flow for existing products, SKP is also scheduled to commence another two new production lines by end-2021 and 1Q22,” he said.

The research house believes both lines will be housed in the newly leased plant and SKP is embarking on another major expansion which could start in 4Q21.

“This could potentially lift its total capacity by 40% once completed. We believe this has showcased the company’s optimism on the continuation of order flows moving forward, fuelled by its major customer’s product innovation and ambitious growth targets,” he said.

However, he also noted that downside risks to the recommendation include major supply chain disruptions after ceding market share to competitors.