Sunningdale Tech (SUNN SP) - Take Profit. Downgrade To HOLD Following Outperformance
- The M&A fever in the precision engineering space continues with Fisher Tech’s recent announcement of a possible transaction.
- We downgrade Sunningdale to HOLD as the share price has done enormously well, returning 29% since our initiation in early-Mar 17.
- Recent insider transactions suggest that a potential privatisation might not be imminent.
- Downgrade to HOLD with an unchanged PE-based target price of S$1.83. Suggested entry price: S$1.65.
M&A fever in precision engineering space continues with Fisher Tech’s potential privatisation.
- On 5 Apr 17, Fisher Tech announced it had received a non-binding expression of interest from a third party, relating to a possible transaction involving the shares of the company.
- Sunningdale remains a prime M&A target, given its substantial free cash flow and solid balance sheet. We reiterate the view that should a privatisation occur, there could be further upside to our S$1.83 target price as Spindex, Innovalues and Chosen were privatised at above historical book valuation.
- Our target price implies a historical 2016 P/B ratio of 1.0x.
Recent insider trades bode well for Sunningdale’s prospects but could indicate a longer wait for the occurrence of any M&A.
- In late-Mar 17, Sunningdale’s Non-Executive Chairman, Mr Koh Boon Hwee, acquired from the open market an additional 1m shares in Sunningdale at an average price of S$1.5985. This gives us further confidence in the future prospects of the company. However, given Mr Koh’s recent purchases of Sunningdale stocks, privatisation might not be imminent.
Expansion into other areas of precision engineering a distinct possibility.
- Sunningdale operates in three segments, namely the consumer IT, automobile and healthcare. Management has not ruled out the possibility of the company venturing into other areas which could possibly include the aerospace and energy sectors.
- Our channel checks indicate that Sunningdale is already qualified in the aerospace sector.
Weak US dollar against Asian currencies suggests potential negative forex impact for the quarter.
- According to Sunningdale’s annual 2016 report, about 50% of Sunningdale’s sales are denominated in US dollars. As the US dollar has weakened moderately against the Singapore dollar and renminbi for 1Q17, we expect a negative forex impact for 1Q17 as the group has a net long exposure to the US$/S$ and US$/Rmb.
- No change to our earnings estimates.
- Downgrade to HOLD with an unchanged PE-based target price of S$1.83 pegged to peers’ average 2017F PE ratio of 11x. Our target implies a historical 2016 P/B of 1.0x.
- We reiterate our view that should a privatisation happen, we would likely see further upside to our target price as Spindex, Innovalues and Chosen were privatised at above historical book valuation.
- Suggested entry price is S$1.65, as we still like the free cash flow generating capabilities of the company and its solid balance sheet (net cash of S$15.5m at 31 Dec 16).
- Sunningdale has been raising dividends paid to shareholders throughout the years and we expect a 6.5 S cent dividend for 2017 which translates into a yield of 3.7%.
SHARE PRICE CATALYST
- Potential privatisation.
- Expansion into new precision engineering segments.