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Tuesday, September 3, 2013

SKP Resources - Weaker Orders Dampen Profit

Source: http://klse.i3investor.com/blogs/rhb/36080.jsp

SKP Resources’ (SKP) 1QFY14 earnings made up only 21% and 22% of consensus’ and our full-year estimates respectively. Revenue fell 11.7% y-o-y due to weaker orders from customers while earnings slid 22.9% y-o-y on rising operating costs after the group implemented minimum wage. Downgrade to NEUTRAL, with our new FV at MYR0.37 (from MYR0.40).

- Below expectations. SKP’s 1QFY14 sales eased 11.7% y-o-y to MYR108.3m from MYR122.7m in 1QFY13, while earnings shrank 22.9% y-o-y to MYR9.1m from MYR11.8m. The weaker y-o-y performance was mainly due to the drop in sales from existing customers during the period, as well as the impact of the minimum wage implementation early this year. Meanwhile, the group’s performance fared better on a sequential basis, with 1Q14 net profit rising 30% q-o-q to MYR9.1m on the back of a 22.9% q-o-q improvement in revenue to MYR108.3m, on the back of lower 4Q13 sales in conjunction with the festivities in 4Q.

- Minimum wages erode margins. Gross profit margin was weaker by 1.2ppt y-o-y to 14.8% (1Q13: 16%), no thanks to higher cost of sales from the implementation of minimum wages and lower sales. This led to EBIT margin contracting 1.9ppt y-o-y to 10.6% (1Q13: 12.5%). The narrower margins reaffirm our earlier view that SKP’s profitability will come under pressure going forward due to higher operating cost arising mainly from the implementation of minimum wages.

- Forecasts. We are cutting our FY14 and FY15 earnings forecasts by 6.4% and 10.9% respectively given the higher than expected operating costs. The key investment risks are lower orders from key customers and weaker consumer consumption.

- Downgrade to NEUTRAL. We revise lower our FV to MYR0.37 from MYR0.40, based on 9x CY13 EPS. Downgrade to NEUTRAL as the stock is currently trading on par with its peer valuation of about 8-9x P/E.


Source: RHB

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