C O M P A N Y U P D A T E Tuesday, November 07, 2017 FBMKLCI: 1,742.29 Sector: Technology THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* SKP Resources Berhad TP: RM2.20 (+10.0%) PCBA Expansion On Track Last Traded: RM2.00 BUY Paul Yap, CFA Tel: +603-2167 9603 paulyap@ta.com.my www.taonline.com.my We recently met up with the management of SKP Resources. Plans to expand into PCBA services are progressing well and should start operations by the 1QFY19. Labour issues are in the past, with existing permits to employ foreign workers sufficient to meet immediate needs. While a minimum wage increase stands as a potential negative, we view the impact as manageable. Targets are to maintain net profit margins at 6.0%, with newer lines running smoothly and operating at optimised production efficiency. In fact, we expect margins to rise to 6.6% and 6.5% in FY19 and FY20 as its PCBA operations come into place. We increase our FY19-20 earnings by 8.6-9.6% and raise our TP for SKP Resources to RM2.20/share. BUY. PCBA Expansion On Track Plans to expand into Printed Circuit Board Assembly (PCBA) services are progressing well. Since our last update, we understand that machineries have arrived, with a single surface mount technology (SMT) line already set up. Occupying the third floor of its latest factory, the set up can cater for up to four SMT lines, as it pursues a two pronged approach (for Customer X and new business opportunities). Operations are likely to begin by the 1QFY19. PCBs are currently captured under cost of sales for Customer X related orders. Hence, this is unlikely to improve sales, but will lead to margin improvements moving forward. Positively, we understand there have also been interest from its other clients for its PCB capacity. If this fruitions, we believe the group will need to set up a new SMT line, which will lead to potential revenue and earnings accretion. Good News for Labour Labour issues are now in the past, with the group currently comfortable with its labour situation. Existing permits to employ foreign workers are sufficient to meet immediate and potential expansion plans. Statements recently made by the Deputy Home Minister are well received, with the government mulling to allow export oriented companies to hire 100% of foreign workers (currently required to hire one local for every three foreign workers employed) for production lines to meet current and future demand. Although a minimum wage increase stands as a potential negative, we view the resulting impact as manageable. Due to its cordial relationship with its customer, it is likely that the cost can be shared by both parties. We estimate, every RM100 increase in the minimum wage will reduce our FY19-20 earnings by 0.9-1.1%. Share Information Bloomberg Code SKP MK Stock Code 7155 Listing Main Market Share Cap (mn) 1250.2 Market Cap (RMmn) 2,500.4 52-wk Hi/Lo (RM) 2.02/1.24 12-mth Avg Daily Vol ('000 shrs) 2,858.6 Estimated Free Float (%) 46.4 Beta 0.45 Major Shareholders (%) Dato Gan Kim Huat - 41.8 EPF - 5.9 Kumpulan Wang Persaraan - 5.4 Forecast Revision FY18 FY19 Forecast Revision (%) - 9.6 Net profit (RMmn) 129.8 184.9 Consensus 134.5 159.8 TA's / Consensus (%) 96.5 115.7 Previous Rating Buy (Maintained) Financial Indicators FY18 FY19 Net gearing (x) Net cash Net cash CFPS (sen) 16.3 13.3 P/CFPS (x) 12.3 15.0 ROAA (%) 13.0 17.5 ROAE (%) 26.2 31.8 NTA/Share (RM) 0.4 0.5 Price/ NTA (x) 4.7 4.0 Share Performance (%) Price Change SKP FBM KLCI 1 mth 26.6 (1.2) 3 mth 42.9 (2.0) 6 mth 56.3 (1.2) 12 mth 48.1 5.6 (12-Mth) Share Price relative to the FBMKLCI Source: Bloomberg Page 1 of 5
Targeting 6% Net Margins Net margins have historically averaged at ~7.0%, but dipped to 5.3% for FY17. This was due to a combination of factors, such as the weaker ringgit, labour constraints and teething issues at new lines. With two of the three factors resolved, net margins rebounded to 6.4% in the 1QFY18. Obtaining permits to employ new foreign workers, the reliance on contract workers have eased. Moving past initial teething issues, new lines are running smoothly and operating at optimised production efficiency. Meanwhile, the impact of a weaker ringgit is neutral in absolute terms, as higher costs are compensated through increased revenues from the cost pass through mechanism. Targets are to maintain net margins at 6.0% going forward. Revise Earnings We impute contributions from its entry into PCBA. This is based on a single SMT line to start operations in 1QFY19. We increase our FY19/FY20 earnings by 9.6%/8.6% to RM184.9mn/RM223.7mn. We expect net profit margins to come in at 6.0% for FY18, before rising to 6.6% and 6.5% in FY19 and FY20 as its PCBA operations come into place. EMS Stocks Rerated Upwards Over the past few weeks, EMS companies have experienced an upward rerating. This has seen the industry s forward PE rise to 14.2x, trading >1SD above its historical average. Satisfying both earnings growth and dividend yield seekers, the industry s earnings is expected to grow by 37.5% YoY in 2018, providing yields of 2.9%. Figure 1 : Forward PE x 30.0 SKP VS Salutica EG PIE Industry 25.0 20.0 15.0 10.0 5.0 0.0 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: Bloomberg, TA Securities Raise TP to RM2.20 We value SKP at a higher TP of RM2.20/share. This is based on a PE of 16x and CY18 EPS of 13.7sen. This is on par with V.S. Industry s PE, as we view both companies as beneficiaries of Customer X s growth plans. We maintain our BUY recommendation on the stock. We view the group as a potential beneficiary of further contract awards by Customer X. This supports our earnings growth expectations of >20% for the next two years. Meanwhile, dividend yields remain attractive at 2.6-4.5%. Page 2 of 5
Peers Comparison Table Company Price (RM) TP (RM) Recom. PE (x) PBV (x) Dividend yield ROE (%) CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 SKP 2.00 2.20 BUY 20.3 14.6 4.9 4.1 2.5 3.4 26.2 30.6 VS 3.10 - - 23.1 16.4 3.3 2.8 2.1 2.7 18.0 20.9 Salutica 1.55 - - 24.2 16.5 3.5 3.1 1.8 2.5 14.4 19.1 EG Industries 0.72 - - 11.3 9.5 0.0 0.0 0.0 0.0 9.3 9.9 PIE Industrial 2.05 - - 13.2 11.4 1.9 1.7 3.8 4.1 14.1 13.7 Weighted average 21.1 15.2 3.5 3.0 2.3 2.9 19.5 22.5 [THE REMAINING OF THIS PAGE IS INTENTIONALLY LEFT BLANK] Page 3 of 5
Earnings Summary P&L Balance Sheet 7-Nov-17 YE Mar 31 (RMmn) FY16 FY17 FY18F FY19F FY20F YE Mar 31 (RMmn) FY16 FY17 FY18F FY19F FY20F Revenue 1,051.4 1,943.6 2,151.5 2,809.3 3,467.2 Fixed assets 193.1 197.1 195.7 189.9 184.7 EBITDA 122.0 159.2 192.5 260.7 309.5 Associates + Subsidiaries 0.0 0.0 0.0 0.0 0.0 Depreciation & amortisation (19.1) (20.6) (21.5) (20.9) (20.3) Goodwill 0.0 0.0 0.0 0.0 0.0 Net finance cost (1.5) (0.2) (0.3) 3.5 5.1 Others 1.8 1.8 1.7 1.7 1.6 EI 0.0 0.0 0.0 0.0 0.0 LT assets 195.0 198.9 197.4 191.5 186.2 PBT 101.4 138.5 170.7 243.3 294.3 Taxation (19.9) (35.2) (41.0) (58.4) (70.6) Inventories 89.8 160.8 138.7 181.1 223.5 MI 0.0 0.0 0.0 0.0 0.0 Trade receivables 191.1 567.2 419.7 548.1 676.4 Net profit 81.5 103.3 129.8 184.9 223.7 Cash 45.6 45.8 107.6 170.1 237.1 Core net profit 81.5 103.3 129.8 184.9 223.7 Others 34.1 80.3 80.3 80.3 80.3 EPS (sen) 6.5 8.2 10.4 14.8 17.9 Current assets 360.6 854.2 746.3 979.6 1,217.4 DPS (sen) 3.5 4.2 5.2 7.4 8.9 Ratios Total assets 555.6 1,053.1 943.8 1,171.2 1,403.6 YE Mar 31 (RMmn) FY16 FY17 FY18F FY19F FY20F Trade payables 147.5 505.0 389.5 524.5 645.1 Valuations ST borrowings 38.2 66.1 0.0 0.0 0.0 PER (x) 30.7 24.2 19.3 13.5 11.2 Others 0.0 0.9 0.9 0.9 0.9 Dividend yield (%) 1.8 2.1 2.6 3.7 4.5 Current liabilities 185.7 572.0 390.4 525.4 646.0 PBV (x) 7.4 5.5 4.7 4.0 3.4 LT borrowings 15.3 7.4 0.0 0.0 0.0 Profitability ratios (%) Others 16.4 18.1 18.1 18.1 18.1 ROAE 33.2 26.0 26.2 31.8 32.7 LT liabilities 31.7 25.5 18.1 18.1 18.1 ROAA 14.5 12.8 13.0 17.5 17.4 EBITDA margin 11.6 8.2 8.9 9.3 8.9 Share capital 112.0 271.3 286.0 286.0 286.0 PBT margin 9.6 7.1 7.9 8.7 8.5 Reserves 226.3 184.3 249.2 341.6 453.5 Shareholders' funds 338.2 455.6 535.2 627.6 739.5 Liquidity ratios (x) MI 0.0 0.0 0.0 0.0 0.0 Current ratio 1.9 1.5 1.9 1.9 1.9 Quick ratio 1.5 1.2 1.6 1.5 1.5 Total liabilities and equity 555.6 1,053.1 943.8 1,171.2 1,403.6 Leverage ratios (x) Cash Flow Total liabilities/equity 0.6 1.3 0.8 0.9 0.9 YE Mar 31 (RMmn) FY16 FY17 FY18F FY19F FY20F Net debt/equity 0.0 0.1 (0.2) (0.3) (0.3) PBT 101.4 138.5 170.7 243.3 294.3 Int. coverage ratio 36.6 43.3 77.6 nm nm Depreciation and amortisation 19.1 20.6 21.5 20.9 20.3 Net interest 1.5 0.2 0.3 (3.5) (5.1) Growth ratios (%) Other non-cash 1.7 (3.8) 0.0 0.0 0.0 Sales 69.8 84.9 10.7 30.6 23.4 Changes in WC (231.3) (95.3) 54.2 (35.8) (50.1) Pretax 81.7 36.6 23.3 42.5 21.0 Interest paid 0.0 0.0 (2.2) 0.0 0.0 Earnings 92.5 26.8 25.6 42.5 21.0 Tax paid & others (22.4) (36.5) (41.0) (58.4) (70.6) Total assets (1.6) 89.5 (10.4) 24.1 19.8 Operational cash flow (130.0) 23.6 203.5 166.5 188.7 Capex (38.1) (24.4) (20.0) (15.0) (15.0) Interest received 1.3 3.0 1.9 3.5 5.1 Others (19.0) (42.0) 0.0 0.0 0.0 Investing cash flow (55.8) (63.3) (18.1) (11.5) (9.9) Net share issue 125.9 55.1 14.7 0.0 0.0 Dividend paid (21.2) (41.0) (64.9) (92.4) (111.8) Net change in debts 53.5 19.5 (73.5) 0.0 0.0 Others (2.8) 5.6 0.0 0.0 0.0 Financial cash flow 155.3 39.2 (123.7) (92.4) (111.8) Net cash flow (30.5) (0.5) 61.8 62.5 67.0 Opening cash flow 76.7 45.6 45.8 107.6 170.1 Forex (0.7) 0.7 0.0 0.0 0.0 Closing cash flow 45.6 45.8 107.6 170.1 237.1 Page 4 of 5
(THIS PAGE IS INTENTIONALLY LEFT BLANK) Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Tuesday, November 07, 2017, the analyst, Paul Yap Ee Xing, who prepared this report, has interest in the following securities covered in this report: (a) nil This report has been prepared by TA SECURITIES HOLDINGS BERHAD for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and will be compensated to undertake the scheme. TA SECURITIES HOLDINGS BERHAD has produced this report independent of any influence from the CBRS or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia s website at: http://www.bursamalaysia.com/market/listed-companies/research-repository/research-reports Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 2072 1277 Fax: 603 2032 5048 www.ta.com.my Page 5 of 5