SKPRES - Quick Comments on News

This one is dedicated to the folks at investssmart chatbox who first alerted my attention to this stock (you know who you are), and to subsequent folks who are persistent in asking me more about this stock. I am not an employee nor related to SKPRES owners nor management, merely a small minority share owner who enjoys trading the stock. Enjoy!

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On Mar 16, the Star carried an article on SKPRES. It gives a good introduction and I feel a decent analysis on the company. I recommend studying the article to supplement your research on SKPRES. My comments are numbered and marked in square brackets below.

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Friday March 16, 2007
SKP Resources eyes double-digit growth
By Izwan Idris
PETALING JAYA: Penny stocks offer a cheaper entry cost for investors [1], hence their popularity among retailers. It is also interesting to look at some of these companies, which are actually worth more than a punt.
SKP Resources Bhd, a Johor-based maker of plastic parts used in many consumer electronic gadgets like high-end television sets, in-car entertainment units and satellite radio receivers.
Its clients include household names like Sharp, Pioneer and Dyson.
SKP Resources' most recent quarter ended Dec 31 saw a 70% jump in net profits to RM4.8mil, or 0.8 sen per share. The company made a net profit RM2.8mil, or 0.47 sen per share, in the previous corresponding period.
“The third quarter was a record for the group. We also had a good start in 2007 and we hope to at least match the results in the last quarter (ending March 31),'' executive director Ivan Gan Poh San told StarBiz recently.
He said the strong performance was largely attributed to the group's expanded operations.
SKP Resources acquired rival SPI Plastic Industries Sdn Bhd in a RM30mil deal [2]completed in August last year.
The company had also completed a new factory in Senai during the year, which gives its an additional 176,000 sq ft of floor space.
“The acquisition and the new factory had given a lot of room for future expansion,'' Gan said. “With that, we don't expect to make huge capital investment over the next three years [3].”
SKP Resources had also benefitted from the trend among large multinationals to move their low-end manufacturing base to Vietnam or China, while existing factories in Malaysia shifted towards premium products [4].
“Margins are improving with better cost control [5] and, at the same time, we are now able to offer value-added services like product design and customisation of certain products,'' Gan said.
Items produced by SKP Resources include components for liquid crystal display TVs and some 200,000 sets of digital or satellite radio receivers bound for the US market every month [6].
“Our target is to register a healthy double-digit growth over the next two to three years [7],'' Gan said.
Assuming that SKP Resources would be able to repeat the performance in the last quarter, the stock is valued at around seven times [8] its estimated earnings for the financial ending March 31. (FY07).
For the nine months ended Dec 31, 2006 net profit had risen 36% to RM10.8mil, or 1.8 sen per share, on sales worth RM119mil. The results year-to-date have already surpassed the group's performance for the whole of FY06.
The stock gained 1 sen to 16.5 sen yesterday. It has risen 28% for the year and hit a 52-week high of 25 sen on Feb 22.
But it would probably take a few more quarters of rising profits for SKP Resources, with a market capitalisation of RM100mil, to attract the attention of big investors and institutional funds [9].
In the mean time, the stock's growth outlook and decent valuations make it a bargain for those willing to take a bet on a promising small cap play.

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Comments

[1] "Penny stocks offer a cheaper entry cost for investors".
Comments: Whilst this does not affect SKPRES Intrinsic Value, it is worth mentioning briefly that penny stocks do NOT really offer a "cheaper entry cost". However, what it does offer is "excitement". Significant profits (e.g. 10%) can be had with what might incorrectly be perceived as small increase in prices over a relatively short period (e.g. a "small" 2 sen increase from $0.17 to $0.19). However, one must always take into account trading expenses (both buy and sell) into any profit calculations. If you don't understand all this, my advise is to avoid penny stocks - the odds of you losing money is higher if you don't understand all this.

[2] "...acquired rival SPI Plastic Industries Sdn Bhd in a RM30mil deal..."
Personally, I like the acquisition for several reasons. 1. The price paid is equivalent to just 6 times earnings, which is slightly cheaper than current SKPRES P/E of 7. 2. It is a good use of surplus cash which doesn't earn anywhere near the potential earnings yield of 16%. 3. The acquisition also enables SKPRES to diversify its earnings base, as the acquired company is largely domestic, whereas SKPRES earnings appears to be largely overseas. 4. The acquisition also removes a competitor domestically. 5. The acquired company is confident enough to provide a profit guarantee of $5M per year for the next 2 years, which makes the investment safer.

[3] "...we don't expect to make huge capital investment over the next three years .. "
Again, I find this very comforting - especially from a cash flow perspective - as the recent cash acquisition has significantly reduced the coy's cash holdings, and one might be rightly concerned if a coy has plans to further expand via huge debts (think MEGAN, although different business model).

[4] "...existing factories in Malaysia shifted towards premium products ..."
Normally, I find this sort of comments neutral. There are some companies that succeeds in the shift (i.e. raise both revenue and margins), and many more that don't (resulting in overall reduced PAT as revenue fall does not match increased margins). Personally, I like to see some evidence of net profit increasing in $ terms (and so far, it has).

[5] "...better cost control... "
A quick glance at the most recent quarter results showed higher PBT% than in the past few quarters, but I haven't really investigate in detail the financial statements to see if these has indeed been achieved via better cost controls (such as reduction in staff cost, etc). However, there seems to be no serious reason to doubt company management's claims.

[6] "...receivers bound for the US market every month... "
With strengthening RM, and possibly weaker US economy, there could be risks that SKPRES earnings could be adversely affected going forward. But I like the recent domestic acquisition which should increase and diversify its earnings base, mitigating this risk somewhat.

[7] "...target is to register a healthy double-digit growth over the next two to three years..."
For the next 9-12 months, I am quite certain that the coy will achieve double-digit growth, just from the recent acquisition alone. The challenge will be after that, if it has no more acquisition, as future growth will then depend on organic growth. The recent factory expansion which is expected to meet its growing needs over the next 2-3 years should give the company good odds of achieving their target. Given the relatively good odds, for the company to trade at a low single-digit P/E of 7 seems to suggest a significant mispricing.

[8] "...stock is valued at around seven times..."
At $0.185, SKPRES is now trading at slightly over 7 times. But FYE2007 only takes into account 2 quarters of recent acquisition results, and virtually nothing on its future growth prospects. Using a conservative FYE2008 which simply takes into account the full 4 quarters of recent acquisition results suggests a P/E of less than 7.

[9] "...attract the attention of big investors and institutional funds ..."
There's no doubt that should there be one large fund buying SKPRES, the only way the price can go is UP. I think, with current attention focussing on the big caps, it might take a (long?) while before the market shifts its attention to undervalued small caps. To be honest, I don't know exactly when - safer to assume it could be a very, very long wait, and not bet the house.

It's also quite possible that syndicates might not touch this stock, if this stock is a candidate for institutional investors - they might get cornered themselves, as they try to corner innocent retailers.

POTENTIAL RISKS
Like all stock investments, owning SKPRES has its own risks too. Some of the risks I perceive include:

1. Intrinsic value related risks ... e.g. possible increase in raw material prices for plastics. RM appreciation, reducing either the price competitiveness of its products in the US markets or its margins. Possible loss of key customers if not competitive. Etc. These are real risks, and much depends on management to control the controllable items and mitigate the risks as much as possible. So far, I like what I see - good use of cash, general avoidance of debt, sound acquisition at an attractive price, sound pace of business expansion, etc. And I like what the coy has achieved so far in the last 8 quarters. Whilst there are no guarantees in the stock market, I like the odds personally. (Remember to diversify, and don't over-trade).

2. Penny-stock reputation. Whilst penny stocks are popular with retailers, I won't be surprised if the vast majority of SKPRES owners in Bursa Malaysia don't really care a hoot about the underlying business behind the blinking ticker. I suspect "Buy and hold" investors might need to wait for a very long time, before the market appreciates its intrinsic value. I think shorter-term traders would fare much better with this stock, buying at the low end of the trading "box" and selling at the higher end of the trading box. Those who believes in its fundamentals may also do better by trading say half of their holdings in this manner. However, if you are a value investor who cannot identify the trading box (and they will vary over time), nor have the time nor inclination to watch the ticker symbol all day, then, my advise is don't buy this stock - there are much better value stocks around that will permit one to Buy and Hold, and sleep well at night. There are also risks with the syndicates "cooking" the price of the stock in order to profit from retailers, but I suspect that's what excites most experienced short term traders as the profit opportunities are bigger.

3. Possible lower interest and lower liquidity in future, as future profit opportunities get squeezed from having more better-informed investors, leaving retailers and syndicates to prefer other less sound, more exciting stocks with greater profit opportunities ...

CONCLUSION
I've read somewhere that it is unfair for any writer to give a stock a Buy recommendation, simply because when it comes to selling time, the writer is often unable to call a Sell recommendation in a timely enough manner to protect the owners who followed him. And since this is more of a trading idea than a "buy and hold" idea, I don't feel comfortable calling a Buy below a certain price, simply because I expect the trading boxes will change over time. So, this one, you're on your own.

Disclaimer
I own SKPRES and have traded the stock several times in the past.
As always, buy and sell at your own risk.
Comments welcomed.