This article first appeared in The Edge Financial Daily, on February 16, 2016.

SKP Resources Bhd
(Feb 15, RM1.24)
Initiate coverage with buy call with target price (TP) of RM1.78: Dyson Ltd announced in 2014 that it was allocating £1.5 billion (RM8.99 billion) towards its research and development budget, and this will eventually culminate in 100 new products that will be launched worldwide in the next four years.

We are positive on SKP Resources Bhd’s long-term prospects as some spillover effects can be seen from Dyson’s aggressive expansion plan. It secured two sizeable contracts from Dyson last year for the manufacturing of cordless vacuum cleaners totalling RM5 billion — the first contract was announced in May 2015 (contract value of RM400 million per annum over five years) and the second contract was announced in September 2015 (contract value of RM600 million per annum over five years).

Taking into account the projects on hand, only 25% capacity of SKP Resources’ new plant in Senai, Johor, has been utilised. With ample spare capacity, we believe the group is well-prepared to take on more contracts, which can come from both Dyson- and non-Dyson-related parties.

Growth is also supported by SKP Resources’ initiative to expand its clientele base and the management has targeted 8% annual growth for non-Dyson contracts. Among areas the management is looking into is the food and beverage packaging segment, with plans to supply more plastic packaging to existing customers such as Unilever, Nestlé, Suntory and Shell.

The recent acquisition of Tecnic Group Bhd has not only increased SKP Resources’ production capacity, but also enabled the group to leverage on Tecnic’s existing clientele to grow its customer base.

We initiate coverage on SKP Resources with a “buy” recommendation and TP of RM 1.78. Our TP is based on 14.6 times fully diluted financial year 2017 (FY17) earnings per share (EPS), which is the sector’s weighted average price-earnings ratio (PER) excluding SKP Resources’.

Although its share price has increased by 40% from the date of the announcement of the first Dyson contract in May 2015, we anticipate further upside given SKP Resources’ strong growth potential with three-year EPS compounded annual growth rate of 44%.

SKP Resources shares are currently trading at an undemanding 11 times FY17 PER. Moreover, given its strong earnings growth potential, it is currently trading at an attractive PER, to growth ratio of 0.25 times. — Alliance DBS Research, Feb 15