SKP Resources Bhd
(Sept 15, RM1.35)
Maintain outperform call with an unchanged target price (TP) of RM1.71: SKP Resources Bhd announced the securing of another five-year contract from its key client Dyson Ltd, this time around also for the manufacturing of cordless vacuum cleaners, though presumably of a different variant. 

This comes in addition to a RM400 million five-year contract which it secured back in May from the same customer for a similar product. 

While no quantum was revealed, the new announcement is in line with our expectations of the group securing more works from Dyson and benefiting from its expected growth in the coming few years.

Our “outperform” call is reinforced, with an unchanged TP of RM1.71 based on a 15 times multiple to financial year ending March 31, 2017 earnings per share of 11.4 sen. 

We could be in for upside earnings surprises should the contract value be larger than expected. 

Though the share price has performed admirably year-to-date and even since our coverage initiation, with respective gains of 109.4% and 51.4%, we see the current price values not fully reflective of its robust growth prospects for the coming two to three financial years.

On the longer term, Dyson’s plans to spend an estimated RM8.5 billion on developing four new ranges of technology which will launch 100 new products all over the world over the next four years are eye-catching. 

Of immediate excitement, however, are its plans to increase the production of motors to 11 million units by year end from four million units last year, suggesting an immense uplift in the production of various other products at both its manufacturing facilities in Singapore and Malaysia, which we are already starting to see as reflected in the two recent (May and current) announcements. 

SKP Resources’ growing standing with Dyson in being a key manufacturing partner, coupled with increased capacity arising from newly acquired subsidiaries as well as from its own expansion, leads us to see the company poised to generate an earnings compound annual growth rate of at least 50% in the next three 

years.

While seemingly intertwined in its fortunes, the group does have about 30% of its output catered to non-Dyson production, among which are reputable household names worldwide. 

The group is also seeing increasing demand for value-added services such as assemblies of plastic products for the electrical and electronic industry helping augment growth, anticipated to be in the range of 8% to 10%. — PublicInvest Research, Sept 15

This article first appeared in digitaledge Daily, on September 17, 2015.