SDS: Cost Efficiencies Drive Earnings Beat Despite Revenue Headwinds
| Investment Bank | PUBLIC INVESTMENT BANK BERHAD |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
SDS Group Berhad reported a core net profit of RM7.03 million for the first quarter of fiscal year 2026 (1QFY26), marking a 19.4% year-on-year decline. Despite the lower absolute profit, the results **surpassed analysts’ expectations**, primarily driven by the company’s effective cost management strategies.
Performance Review
For 1QFY26, revenue saw a modest **2.2% year-on-year increase, reaching RM84.84 million**. This growth was predominantly spearheaded by the wholesale segment, which recorded a 5.3% year-on-year expansion. Conversely, the retail segment experienced a 2.4% year-on-year contraction. Gross profit for the quarter decreased by 2.9% year-on-year to RM28.15 million, leading to a 1.7 percentage point contraction in gross margin to 33.2%. Operating profit similarly declined by 23.9% year-on-year to RM9.24 million. The year-on-year decline in core net profit was largely attributed to higher depreciation and staff costs.
Strategic Cost Management
The primary driver behind the unexpected earnings beat was the company’s diligent **lean cost control initiatives**, which effectively mitigated the impact of softer utilization levels within its manufacturing and distribution operations. Notably, selling and distribution expenses were lower year-on-year, providing a positive contribution to the bottom line amidst revenue challenges. This strategic cost approach proved crucial in managing the impact of aggressive promotional activities and intense competition prevalent in the market.
Challenges and Future Outlook
While SDS Group Berhad successfully navigated internal cost pressures, the quarter saw challenges including **softer utilization rates** across operations and a cautious consumer sentiment, particularly impacting the retail segment. Nevertheless, the outlook remains optimistic. Management anticipates a **robust order book** and sustained demand for staple goods. Expectations are for new festive campaigns and strategic zone projects, such as the Johor-Singapore Special Economic Zone (JIS-SEZ), to further bolster sales and earnings momentum in the forthcoming quarters.
Investment Recommendation
Public Investment Bank Berhad maintains its “BUY” recommendation on SDS Group Berhad. The **target price remains at RM0.25**, representing a 25.0% upside potential from the last traded price of RM0.20. This valuation is based on a 12x CY26F EPS.
