Friday, January 30, 2015

SKPRes ... Acquisition Reduce Dependcy On Dyson

Its aggressive expansion drive, including a new factory and acquisition of several plastic mould and product manufacturing units, will boost its coffers.

In addition, low oil prices and weaker ringgit will see bigger orders for the company’s plastic parts and devices because of greater demand for high end home appliance products.

It is expected to complete the acquisitions of several Technic Group’s units involved in design and fabrication, plastic injection and blow moulding, and assembly of plastic products, for a total of rm200 million by 1QFY2015. Its new assembly plant is scheduled to be completed by end March 2015.

The Technic untis produce plastic products for the automotive, electrical and electronics, industrial packaging and consumer packaging sector. With these acquisitions, SKP Res will become Malaysia’s largest integrated plastic component manufacturer.

The latest acquisitions will also provider SKPRes with a more diversified clientele instead of having to depend on solely on Dyson of the UK for the bulk of its business, besides widening its range of services.

It is also expected to benefit from the US economic recovery, which will have a positive impact on its FY2016 earnings.

Some are concerned about the group’s aggressive expansion drive but the company instead used its strong cash position for value creation. The acquisitions were done at reasonable prices and also did not deviate from its core business.

70% of the group Dyson’s products are sold to non EU markets. Furthermore, the economy recovery in the US should benefit SKP Res as 40% of Dyson’s products are going to the US market.

Its new capacity which is expected to be completed by 1QFY2015 will increase its production capacity over three years from Jan 2015. The new capacity will help cater to ramp up in demand for Dyson’s related products.

While orders to fill in the new capacity have yet to be confirmed, lower oil prices and weaker ringgit would attract Dyson to give more orders to SKP Res.

The new production capacity is to cater to Dyson’s new product. SKP Res is now producing two product ranges. In addition, do not discount SKP Res’ ability to secure new contracts.

Dyson, which produces home appliance products targeting the premium markets in developed countries, is SKPRes’ largest client, account for about 55% of its revenue. SKP’s other multinational corporation customers include Panasonic, Pioneer, Sony and HP.

The acquisition of the Technic’s unit is view positively as it allows the company to provide its customers with a larger range of value added services and cites STSM, a well known plastic mould market as an example. The acquisition also provide synergistic benefits.

It is also expected to benefit from economies of scale post acquisition and reduce its concentration risk on Dyson. Expects Dyson to account for only 35% of its total revenue from the current (Jan 2015) 55%.

This will indirectly reduce the group’s dependency on its largest customer. Apart from the single customer risk, revenue will be spread across a larger number of industries, including automotive, oil and gas, F&B and consumer products.

As the PER ratio of the target companies is lower than SKPRes’ implied PER, the acquisition will be earnings accretive to the group. The acquisitions will be satisfied by rm100 million cash and 172.4 million new shares at rm0.58 each.

Observers opine its strong net cash position and good track record in generating operating cash flow do not foresee significant hike in gearing. In the near term, it could potentially turn into a net debt position after the rm100 million cash acquisition and working capital requirement but this should only be short term and it could quickly pay back with its strong cash flow.

The acquisition is a related party transaction as the major shareholder Datuk Gan and family collectively own 70.5% and 68% in SKPREs and Technic Group. Post acquisition, Gan and his family will drop to 68.4%.

For 1HFY2015 ended Sept 30 its net profit rose to rm20.18 million from rm16.42 million a year earlier.

Its 2HFY2015 earnings will accelerate on the back of higher utilization rate from production of higher utilization rate from the production of two new Dyson models which began in early Nov 2014.

It has a minimum payout policy of 50%.

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