SKPRES: Operational Headwinds Weigh on Recent Performance, But Investment Bank Maintains BUY Call with Raised Target Price

A recent research report highlights a challenging period for the integrated plastic manufacturer, with its second-quarter core net profit seeing a significant year-on-year decline. The firm’s cumulative first-half earnings also fell short of both analyst and consensus expectations. Despite these headwinds, the investment bank maintains a positive long-term view, citing ongoing strategic initiatives and an attractive valuation.

Performance Review

For the second quarter of FY26, the company reported a core net profit of RM27.5 million, marking a 20% year-on-year reduction. This contraction was attributed to lower revenue, start-up costs associated with onboarding new customers, and the impact of a minimum wage hike. Revenue for the quarter declined 15.4% year-on-year to RM537.4 million, primarily due to softer order flows from a key customer, influenced by weaker global consumer sentiment post-reciprocal tariffs.

Cumulatively, 1HFY25 earnings of RM54.7 million represented 43.6% of the investment bank’s full-year forecast and 43.8% of consensus estimates, falling below expectations. On a quarter-on-quarter basis, however, revenue saw a 4.8% increase from RM513 million, suggesting a stabilization in market conditions. The gross margin also improved by 1.1 percentage points year-on-year to 13.1%, benefiting from a low base effect stemming from a one-off inventory write-off in the previous year.

Operational Challenges and Adjustments

The report indicates that while market conditions have shown some signs of stabilization, the initial impact of reciprocal tariff announcements and a slower-than-expected recovery in order volumes from other regions continue to pose challenges. The company is actively addressing rising operational pressures, particularly increasing labour costs, by exploring further production automation to mitigate these impacts.

Future Outlook and Strategic Initiatives

The investment bank remains positive on the company’s long-term outlook, underpinned by its strategic expansion into Printed Circuit Board Assembly (PCBA) and injection moulding capabilities, which are broadening its product range. The group is actively engaged in discussions with several potential clients, a move expected to diversify its customer base and enhance earnings resilience. These initiatives are crucial for mitigating current operational pressures and fostering sustainable growth.

Investment Bank’s Assessment

Despite the recent earnings contraction and a downward revision of FY26F-28F earnings estimates due to potential long-term weakness, the investment bank believes the company’s valuation remains attractive. The stock is currently observed trading below its 5-year forward PE average, suggesting an undervalued position. The bank maintains a BUY recommendation, setting a new target price of RM0.25, which implies a 25.0% upside from the last traded price of RM0.20. This positive outlook is underpinned by the aforementioned strategic initiatives and potential for earnings resilience.