KUCHING: SKP Resources Bhd’s (SKP Resources) earnings will likely improve in the second half of financial year 2017 (2HFY17).
AllianceDBS Research Sdn Bhd (AllianceDBS Research) revealed that it was not concerned that SKP Resources’ 1HFY17 reported earnings of RM41 million only achieved 32 per cent of the research house’s FY17 forecast.
This was thanks to SKP Resources having two major contracts from its main customer, client D, involving contracts for the manufacturing of new cordless vacuum cleaners and hairdryers.
“We understand that these two items are client D’s best-selling products and we believe SKP Resources’ current production orders have exceeded the initial volume agreed in the contract agreement,” it said.
AllianceDBS Research expected significant improvement in earnings for 2HFY17 due to margin recovery following the resolution of labour issued that prevailed in 1HFY17, increase in order volumes of the cordless vacuum cleaners from client D and success of the newly launched hairdryer product from client D.
Furthermore, the research house believed SKP Resources is in a good position to win more sizeable contracts from client D given the group’s track record and spare capacity.
According to AllianceDBS, circa 55 per cent of revenue in FY16 was derived from client D.
Looking forward, the research house forecasted this key customer to contribute an even higher portion, circa 72 per cent in FY17F.
“In the event that its key customer reduces or terminates contracts with SKP Resources, the latter’s earnings could be materially and adversely affected,” the research house said.
However, AllianceDBS Research was not overtly alarmed by this risk, as the contract wins were on a mid-term basis.
The research house noted that SKP Resources currently has two significant contracts from client D worth circa RM1.1 billion per annum which will run for another four to five years.
Given the group’s longstanding relationship with client D, the research house was positive about SKP Resources’ long-term prospects as it has been able to continuously secure manufacturing contracts for client D’s latest flagship products.
Overall, AllianceDBS Research maintained its ‘buy’ call on SKP Resources with a target price of RM1.88 per share.