SUNNINGDALE TECH (SUNN SP) - UOB Kay Hian 2017-05-15: 1QFY17 Powering Into 2017

SUNNINGDALE TECH (SUNN SP) - UOB Kay Hian 2017-05-15: 1QFY17 Powering Into 2017 SUNNINGDALE TECH LTD BHQ.SI

SUNNINGDALE TECH (SUNN SP) - 1QFY17 Powering Into 2017

  • Sunningdale reported a strong set of 1Q17 results with core profit to owners rising 41% yoy. The group’s focus on streamlining operations has paid off handsomely as gross margins have expanded at a faster pace than we anticipated. 
  • With a new plant in Penang, Malaysia and new capacity in the new manufacturing facility in Chuzhou, China, Sunningdale is on track for a phenomenal year while simultaneously building for the future. 
  • Upgrade to BUY. Target: S$2.04.



VALUATION


We upgrade the company to a BUY with a higher PE-based target price of S$2.04. 

  • Even at current valuations, Sunningdale Tech (Sunningdale) offers an attractive dividend yield of about 3.5% with a net cash position of S$12.8m.
  • Sunnindale is trading at about 0.9x 2017F P/B. 
  • In the event of an M&A, we could potentially see further upside to our target price as peers such as Innovalues, Chosen Holdings and Spindex were taken over at above-book valuation.

Net profit after tax grew from S$3.6m in 1Q16 to S$7.7m in 1Q17. 

  • This was driven by further improvements in operational efficiency, a leaner business model and growth in most of the group’s business segments. 
  • The automotive segment sales grew 14.7% yoy to S$67.3m in 1Q17. The consumer/IT division reported a 10.7% yoy increase in sales to S$65.9m while the group’s healthcare segment climbed 15.9% yoy to S$13.7m. 
  • Stripping out one-off effects, net profit grew by 41.3% yoy from S$6.8m in 1Q16 to S$9.5m in 1Q17.

Margins on the rise. 

  • Gross margin trended upward from 13.6% in 1Q16 to 15.0% in 1Q17 due to better operational efficiencies, higher operating leverage and a better sales mix. 
  • The group’s automotive segment, which generally enjoys higher gross margins (est. 15-20%) as compared with the group’s consumer/IT segment (est. 10- 15%), accounted for 39% of sales for 1Q17 vs 36% in 1Q16. This better sales mix could likely have contributed toward better gross margins in 1Q17.


OUR VIEW


Looking to the future. 

  • As the economic and political climate remains uncertain, Sunningdale continues to pursue productivity measures to streamline operations to mitigate pricing pressure from customers. 
  • The group has begun construction on a new manufacturing facility in Penang Malaysia which should be concluded by the 1Q18. This facility will house the group’s latest precision engineering technology. 
  • The company is also in the progress of adding new capacity to its manufacturing plant in Chuzhou, China which should support further growth opportunities in the region.

Automotive growth the key driver for 2017. 

  • Sunningdale is guiding for its automotive segment to remain as its key growth driver for 2017, driven by low fuel costs and low financing rates.


STOCK IMPACT

  • We have raised our 2017/18 gross margin estimates by 60bp/50bp to reflect the impact of a more favourable sales mix and better-than-expected operational efficiencies. 
  • Our 2017 and 2018 net profit estimates have increased by 8.3% and 10.6% respectively.


RECOMMENDATION

  • We upgrade Sunningdale to a BUY with a PE-based target price of S$2.04 which is pegged to peers’ 2017F average PE of 11x.




Nicholas Leow UOB Kay Hian | Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-15
UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 2.04 Up 1.830



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