SKPRES: Earnings Miss Expectations Amid Cost Pressures, Future Brightens with Diversification

An investment bank’s recent research report highlighted a manufacturer’s first-quarter FY26 performance, indicating that earnings fell below expectations despite a relatively stable top line. The report points to market headwinds and increased operational costs as primary factors, while maintaining a positive long-term outlook and reiterating a “BUY” recommendation for the stock.

Performance Review

For the first quarter of FY26, the company reported a net profit of MYR27 million, marking a 10% decline both year-on-year (YoY) and quarter-on-quarter (QoQ). This figure notably fell short of analyst and consensus full-year forecasts, representing only 19-20% of the anticipated earnings. Revenue for the quarter stood at MYR513 million, demonstrating a flat performance (+2%) YoY but an 11% decrease QoQ.

The underperformance was primarily attributed to softer-than-expected sales traction, exacerbated by ongoing global trade tensions. Additionally, the gross profit margin (GPM) experienced a 1.3 percentage point slip YoY to 13%. This compression in GPM was largely due to rising production costs and significant start-up expenditures incurred for onboarding new customers, further impacting profitability. Order demand also faced dampening effects from uncertainties stemming from US tariff policies.

Future Outlook and Growth Drivers

Despite the current challenges, the investment bank remains optimistic about the manufacturer’s future prospects. Demand from its key customer has remained largely stable, providing a degree of immediate-term earnings visibility. Crucially, the company has successfully secured another new customer, with commercial production slated to commence by the end of 2024. This strategic addition is expected to reduce single-customer concentration risks and help fill capacity at its new production plant.

Furthermore, the company is actively engaged in discussions with additional potential customers. This increased interest follows the US Government’s tariff policies, which are compelling more brand-owners to diversify their production sources, presenting a significant opportunity for the manufacturer to expand its market share and client base.

Recommendation

Given the group’s strategic position to capitalize on the opportunities arising from supply chain decentralization and diversification trends, the investment bank has maintained its ‘BUY’ rating for the stock, with a target price of RM0.25. The analysts believe these long-term growth drivers will outweigh near-term operational pressures. Key risks to this recommendation include a significant loss of market share and a major slowdown in global demand.