Analyst antipates healthy 3Q earnings for SKP

SKP’s prospects beyond the immediate term are also rosy due to contributions from new production lines and the bullish growth targets of its key customer 

by ANIS HAZIM / Pic Source:

SKP Resources Bhd’s results for the third quarter of 2022 (3Q22) are expected to be in line with RHB Research’s estimate due to the group’s smooth production ramp-up post lockdown. 

Its analyst Soong Wei Siang said SKP’s prospects beyond the immediate term are also rosy, supported by contributions from new production lines and the bullish growth targets of its key customer. 

“Its current valuation is attractive, considering the scarcity of stocks or sectors offering similar growth profiles,” Soong said in a note last Friday. 

Meanwhile, SKP’s proactive and progressive efforts to strengthen its labour standard are currently ongoing. 

Hence, Soong expects 3Q22’s numbers to meet RHB Research and consensus forecasts. 

“3Q22F should reflect a healthy ramp-up in production volume following the removal of workforce capacity restrictions and lift revenue by more than 20% quarter-on-quarter (QoQ),” he said.

However, the analyst opined that SKP’s sales figure may not replicate the high 3Q21 base as production was slightly affected by the delay in delivery for some of the component parts.

“Margins should remain stable, so we expect 3Q22F net profit to grow QoQ — largely in tandem with its topline growth,” he noted. 

Thus, RHB Research maintains its ‘Buy’ call and target price (TP) of RM2.40 based on 62% upside with 4% of the financial year of 2022 (FY22F) in March yield. 

“We make no changes to our earnings forecasts and TP, based on 19 times price-earnings of the calendar year of 2022. 

“No environmental, social and governance adjustment was achieved, on its score of 3.0,” he added. 

The analyst also expects SKP to scale greater heights in FY23F by 25% year-on-year (YoY) as it is on track to meet its FY22F earnings growth of 28% YoY. 

“This will be underpinned by two new production lines coming on stream by early FY23F and higher internalisation where more components will be manufactured in-house, thereby boosting margins,” he said. 

Besides, the analyst stated that SKP’s major customer has indicated ambitious growth targets, and SKP is looking to capture the rising demand via its new production plant of 40% capacity that is scheduled to be completed by the end-2022. 

“We also look forward to the potential onboarding of a new customer for SKP to boost its orderbook and diversify revenue streams,” he added. 

Concurrently, SKP’s current valuation is attractive with trading below the five-year mean which is unwarranted. 

“Considering the exciting and visible earnings growth on offer as it is being largely shielded from the rising cost environment and potential political risks in Malaysia,” he noted. 

Soong also expects the labourrelated overhang to be removed in the near term as SKP is proactively reviewing and upgrading its labour policy which is targeted to be resolved by March. 

“Thereafter, SKP is planning to appoint an independent auditor to ensure its labour standards can comply with the relevant benchmarks from time to time,” he further said. 

Meanwhile, the analyst views downside risks could be in the form of a major supply chain or labour supply disruptions and delays in the progress of construction on its new plant.