By Chan Quan Min
Have a thing for Dyson’s high-end, high-tech household machines? The whirr of its cyclone technology powered vacuum cleaners can be heard at Johor-based SKP Resources. But SKP is more than just a way to buy into Dyson’s growth story.
Business model: SKP Resources Bhd is soon to be Malaysia’s largest plastic parts manufacturer after the completion of a takeover of a smaller rival.
The company counts among its largest customers big-name multinationals such as Dyson, Hewlett-Packard and Sharp.
Based in Batu Pahat, SKP calls itself a one-stop shop for injection moulding, spray coating and assembly of plastic parts and devices. The acronym SKP stands for Sin Kwang Plastic.
Recent years has seen the company branched out more into property, manufacturing precision injection moulds and the assembly of electronic and electrical equipment though subsidiaries Goodhart Land, Goodhart Technology and Goodhart Industries.
For the financial year ended March 2014, SKP turned in a pre-tax profit of 40 million on the back of revenue of 413 million.
SKP is in the midst of acquiring smaller rival Tecnic Group Bhd for RM200 million to be satisfied in two equal parts by cash and new shares.
The company is expanding very rapidly. A new plant currently slated for completion from December is expected to add 75% to production capacity over the next three years.
Shareholders and management assessment: A father-and-son team runs SKP. Gan Kim Huat is the managing director with over 30 years experience in plastics injection moulding.
His son Gan Poh San is an executive director, also with wide knowledge of plastics engineering. He is fluent in the Japanese language, which helps tremendously in communicating with the company’s many Japanese customers.
Gan Kim Huat indirectly controls a 49.5% equity stake of SKP Resources while Gan Poh San also has a sizeable 21% stake.
Share performance: Shares in SKP listed on Bursa Malaysia saw a sharp revaluation between April and June earlier this year. The share price doubled during those three months to the current trading band of between 58 sen and 68 sen.
What analysts think: Following a visit to SKP earlier this month, analysts at UOB Kay Hian gushed at the company’s “lean manufacturing and tooling capability, which are the key criteria in securing multinational corporation contracts.”
UOB Kay Hian is optimistic on growth prospects, predicting 58% year-on-year growth for the financial year ending March 2016 after taking into consideration the acquisition of Tecnic.
Other analysts to the exception of Kenanga were similarly upbeat about the company. RHB Research said SKP is “poised to achieve a two-year earnings compound annual growth rate of 58%.”
TA Securities, which has the highest target price for the stock at RM1.10 reckons the SKP-Technic deal has many “potential synergies.” For one, the merger would “reduce the long standing single customer risk,” the firm said in a report.
Dyson, a UK-based company specialising in high-end vacuum cleaners, accounts for a revenue share of 55%. TA Securities estimates that this share will fall to 35% after the takeover of Tecnic is complete.
According to the securities firm, SKP and Tecnic are a “match made in heaven.” The enlarged entity will reportedly have more market clout and the ability to “offer current and prospective customers an increased range of value-added services.”
A July report by Kenanga was more circumspect. While the investment bank is confident on the company’s continued growth, it believes that its future earnings performance has already been priced-in by the market.
Kenanga noted that Dyson has recently increased its orders and SKP will now produce the firm’s newest vacuum cleaners and bladeless fans.
“The new products are expected to fetch higher margins in view of better product efficiently,” read the Kenanga report. “Note that management has a cost pass-through mechanism with clients, which allows the group to mitigate currency and raw materials risks.”
StockStalk: First off, SKP is a great local market pick to get close to Dyson. If you are a fan of the high-end, high-tech vacuum cleaners, bladeless fans and hand dryers Dyson sells at hefty price tags, SKP is worth considering.
Even on its own, the company sells itself. Investors are increasingly looking beyond blue chips on account of their expensive valuations. But unlike most companies in the small to mid-cap range, SKP is well managed and invests heavily in new technology.
Manufacturing operations that stay ahead of the game through innovation like SKP are typically favoured by investors. This is because manufacturing in Malaysia is often a low-margin game with little excitement, which makes SKP look like a breath of fresh air.
The concern over single customer risk brought up by some analysts appears valid. But, in truth, there is little to no chance of Dyson and SKP parting ways. Both companies have a strong links established over years.
SKP has specialised tools and capabilities unique to Dyson’s product range. It would be difficult now for Dyson to find a new contract manufacturer.
Another reason investors my go for SKP is to jump in early before the company reaps the benefits of its acquisition of Tecnic, which could be a catalyst to another rally.
Most analysts feel the price paid for the acquisition is fair.
Investors also have to be aware that future earnings may have already been priced in. Short-term investors might also find that the share price only moves sideways.
TA Securities’ RM1.10 target price for SKP is based on forward price-to-earnings ratio of 12 times for the financial year ending March 2016, which is reasonable.
If the growth story goes according to plan, the share price will eventually go past the RM1 mark, no doubt about it. The real question is when?
____________________________________________________________________
Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
You must be logged in to post a comment.