RHB Research sees improved earnings for SKP Resources

RHB Research today maintained its buy call on SKP Resources with its unchanged target price of RM1.98, offering 25% upside and 3.6% yield forecast for the financial year ending March 2021 (FY2021F).

“Our target price of MYR1.98 is based on 18x 2021F P/E, which is at +2 standard deviation from its 5-year mean. The premium is justified considering the forthcoming earnings inflection and explosive growth. Notwithstanding the year-to-date (YTD) share price gain of 17%,” analyst Soong Wei Siang said.

 “We came away from SKP Resources’ management meeting feeling reassured that the anticipated earnings recovery is well underway – this will propel overwhelming earnings growth of +91% year-on-year for the remainder of FY21F,” he added.

Soong believes tendering for new jobs could begin end of the year, presenting the opportunity to secure more orders, on top of the market pursuit of sectors/stocks offering visible earnings growth amidst uncertainties which would further re-rate the stock after the 17% YTD rally.

RHB’s decision to keep its previous target price was also based on an optimistic SKP Resources management.

The management was upbeat on the business and earnings outlook ahead, on the back of strong ramp-up in sales orders from a key customer, margin normalisation on improved production efficiency and the absence of start-up expenses, while the Printed Circuit Board Assembly (PCBA) and battery pack production have started to contribute positively vs the loss-making position in the financial ended March 2020.

Soong noted that the visibility management has, until end of the year, suggested that the robust order flows would be sustained.

This, he said, could be due to the proliferating work-from-home trend globally driving higher demand for its key customer’s products.

“In addition, distribution is relatively less affected by the ongoing lockdowns given the online sales exposure.

“To put things into context, we forecast a 91% y-o-y jump in earnings growth for the remainder of FY21F.

“Meanwhile, the key customer could call for new product tendering by end-2020, and we believe SKP Resources is in a good position to contest in view of the proven track record in recent years, therefore we have built in a new orders assumption of RM250 mil in financial year 2022F.”

SKP Resources share price stood at RM1.66 as at 10:13 am today with a market capital of 2.08 bil. – Sept 15, 2020


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