By Stella Goh – As published in Inve$t Malaysia 29 May 2020 issue

Overview
SKP Resources Berhad (7155) was founded in 1974 and is based in Johor Bahru. SKPRES is a plastic contract manufacturer in the electrical and electronic plastic industry. The company’s growth since then has been phenomenal with Sin Kwang Plastics conceiving and producing a plethora of general plastic products that have become household mainstays.
Today, SKPRES is a stalwart in the region and was listed in the Main Market of Bursa Malaysia. The company has more than 1 million combined square feet of plastic manufacturing facilities in Johor Bahru, housing more than 250 of the latest injection moulding machines as well as a workforce of 2,500 which is still growing as its operations expand to meet the needs of its clients.
Business Model
SKPRES is in the business of offering manufacturing and assembly services to its clientele with brands from office automation equipment, IT equipment, audio and visual equipment, home appliances, automotive components, medical equipment and computer peripherals. For example SHARP, Pioneer, Flextronics, Dyson, SONY, FUJITSU and Panasonic are just a few global brands that are clients of SKPRES.
With more than 40 years of industry experience, the company is armed with a wide array of manufacturing capabilities, state-of-the-art technologies and a professionally trained technical team. The company provides services from product conception right down to the assembly and finally international shipment. A typical example of the services would be new product development, full-services engineering consultation and support, prototype creation, mould design and fabrication, close-tolerance plastic injection, advance secondary process operation for cosmetic and appearance finish, component assembly, contract manufacturing and quality assurance.
SKPRES has 120 to 280 tons of Electrical Injection moulding machines, self-developed spray-painting facilities and even an in-house robotics research and development team that produces industry-leading solutions fitted exactly to clients’ requirements.
Financial Review

For FY2019, SKPRES has paid a final single-tier dividend of 3.84sen per ordinary share amounting to RM48,007,000 with a dividend yield of 2.87%. Even though the total dividend paid in FY2019 is not the highest over past 3 years, the company was still able to maintain a dividend payout ratio of 49.7% indicating that the company is paying almost half of its earnings as dividend to shareholders. The company has intentions to maintain 50% of its net profits as dividend to shareholders, which it has accomplished over the past 8 years. (refer to Prospects & Challenges and Insight at the end of this article)

SKPRES has achieved a consistent growth in its quality of earnings over the past 3 years (1.647 times) in FY2019 compared to 1.487 times in FY2018 indicating that the operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound.

Based on the computation of liquidity ratio, SKPRES has achieved the highest current ratio of 2.502 times in FY2019 over the past 3 years indicating that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM267.166 million) if any unforeseeable circumstances occur. SKPRES is able to do so by using its current assets such as inventories, trade and other receivables, tax recoverable, other current assets, other investments, cash and bank balances amounting to RM668.569 million.

Even though SKPRES is unable to achieve the gross profit margin of more than 30% over the past 3 years, the company was still able to achieve the highest gross profit margin of 11.54% in FY2019 when compared to FY2018 & FY2017. The increase in gross profit margin was mainly due to the company’s continuing diversification plans to its business proposition by differentiating its business model and pursuing a manufacturing strategy in various sectors.
Based on Annual Report 2019, the Electronic Manufacturing Services (EMS) segment of the company which serves its customers in the Food & Beverage, Industrials and Automotive sectors saw a positive growth throughout the year. The company has made progress on improving its product offerings and new injection moulding capabilities through the installation of state-of-the-art manufacturing facilities. As a result, it contributed to increased productivity and efficiency throughout its operations, supply chain and other key functions. These initiatives have enabled the company to achieve the sustainable results.

SKPRES has achieved the lowest Return on Equity (ROE) of 16.45% in FY2019 over the past 3 years. However the company was still able to maintain its Return on Equity (ROE) of more than 10% indicating that it is being well managed and is making good profit relative to its shareholders’ capital. It may also indicate that the sales generated by the company is more than its assets since the company has an asset turnover ratio of 8.09% in FY2019. The management of the company is seen as effective and capable in effectively deploying the resources in the company as well.

SKPRES has a decreasing Total Debt to Equity ratio of 0.483 times in FY2019 over the past 3 years indicating that the company is good at paying off its debt obligations. The Total Debt to Equity ratio, being the lowest in FY2019 at less than 0.5 times, indicates that the company has a lower risk as its total liabilities only amounted to RM284.444 million as compared to RM588.664 million of total equity.
Cash Flow Statement
The net cash from operating activities has provided a positive cash flow of RM151.902 million in FY2019 as compared to RM183.769 million in FY2018. The decrease in net cash from operating activities was mainly due to decreases in the operating profit before working capital changes. Even though the operating cash flow is lower in FY2019, the company is still healthy and has enough cash for business expansion.
The net cash from investing activities in FY2019 (-RM111.826 million) was mainly due to the purchase of other investments (RM90.862 million) and purchase of Property, Plant and Equipment (PPE) (RM29.108 million). The negative cash flow indicates that the firm is investing more in its business for growth.
The net cash from financing activities in FY2019 (-RM63.447 million) was mainly due to the dividend paid (RM63.347 million) and repayment of finance lease liability (RM100,000).
Prospect and Challenges
Despite the challenges in the global market caused by US-Sino trade tensions as well as Covid-19 pandemic, business sentiment of SKPRES remains positive. The company is strategically well positioned in the Electronics Manufacturing Services (EMS) industry and continues to pursue opportunities to grow its market share from its existing customers. It plans to continue to expand its Printed Circuit Board Assembly (PCBA), injection moulding and engineering capabilities to take advantage of a widened product portfolio. It remains driven to achieve profitable growth by focusing on operational excellence.
During FY2019, the company has invested approximately of RM25 million towards growth. The investment includes the purchase of a new factory which is adjacent to its current Johor Bahru operations and will house the brand-new setup for its state-of-the-art injection moulding facility. SKPRES also stated that the new facility will expand the company’s injection moulding capability and capacity in Johor Bahru for higher added value products. The first phase is expected to commence operations in the second half of FY2020.
Rating System

Return on Equity (ROE) = Good
Revenue [3 Years CAGR] = Excellent
Net Earnings [3 Years CAGR] = Average
Dividend Yield = Poor
Interest Coverage = Excellent
Quality of Earnings = Excellent
SKP Resources Berhad Share Price Over 3 Years

My Insight
Based on the calculation on Discounted Earnings Model, SKPRES has an intrinsic value of RM1.401. The current share price of SKPRES is RM1.06 which makes it an undervalued stock (as at 28 May 2020). SKPRES has a beta of 1.487 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), SKPRES has an expected market return of 1.37%.
In conclusion, SKPRES may look attractive to investors due to its consistent net earnings growth, low debt level, excellent Quality of Earnings and good Return on Equity. However its dividend payout ratio, although more than 40% for past 3 years worked out to a dividend yield of 2.87%. SKPRES’s low debt will provide comfort to investors who find a company’s high debt reason for concern during economic uncertainties and as well as lockdowns. The company has a net cash of RM40.035 million in FY2019 as well as more liquid assets (RM668.569 million) as compared to its current liabilities (RM267.166 million). The company’s prospects remain bright as the company’s long-term plans are focused on driving shareholder value. It still remains to be seen how the MCO has affected its production & logistics capabilities. Moreover the outlook for the global economy remains uncertain which will be a dampener on market sentiments. Investors will need to take into consideration all the aspects that could affect growth prospects in the near future.
Disclaimers
The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.