This article first appeared in The Edge Financial Daily, on July 19, 2016.

SKP Resources Bhd
(July 18, RM1.23)
Maintain buy with a lower target price (TP) of RM1.55: SKP Resources Bhd has clinched a four-year contract with Dyson Ltd totalling RM2 billion for the manufacturing of hairdryers.

We cut our forecast financial year 2017 (FY17) earnings by 15%, due to the half-year impact from April to September 2016 from the increase in labour cost and modification of the production lines. Despite these short-term challenges, we are assured of the group’s mid-term prospects from the accretion of the sizeable contracts. The recent price weakness has priced in these short-term challenges and offers long-term investors accumulation opportunity. The recent launch of the Supersonic (V9) hairdryer has the potential to be the next best-selling product with glowing reviews from the Japan and UK launches.

We are “positive” on the developments as SKP Resources is currently the sole manufacturer for this product. SKP Resources intends to go into the production of printed circuit board assembly in the medium term. This will complement its present tooling, plastic moulding and full-assembly operations, namely for the manufacturing of Dyson products.

We cut our TP to RM1.55 (previously RM1.78) which is based on 15 times fully diluted forecast FY17 earnings per share, in line with the sector’s weighted average price-earnings ratio (PER) valuation excluding SKP Resources. The stock is currently trading at an undemanding 12 times forecast FY17 PER.

We forecast Dyson to contribute an even higher portion of around 72% in FY17. In the event Dyson reduces or terminates contracts with SKP Resources, the latter’s earnings could be materially and adversely affected. — AllianceDBS Research, July 18