Sunningdale Tech Ltd - CIMB Research 2017-07-04: The Industry Consolidator

SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - The Industry Consolidator

Sunningdale is a plastic injection moulding (PIM) company with global manufacturing presence in the Americas, Europe, India and the rest of Asia.
The company is backed by net cash balance sheet at end-1Q17 and projected dividend yields of 4.7-5.0% over FY17-19F.
Its global manufacturing presence and size could attract M&A interest, in our view.

There is room for margin improvement, given continuous cost reduction initiatives.
It is trading at 7.8x/7.2x FY18F/19F P/E vs. projected core EPS growth of 11%/8%.

Sunningdale Tech has more than 30 years of experience in the precision plastic injection moulding and mould-making industry. It has a diverse customer base, ranging from the automotive industry to the consumer/IT and healthcare industries. About 80% of its FY16 revenue was derived from 30 customers, while its top 10 customers accounted for about 50% of its revenue.

YTD, Sunningdale’s share price has gained 63%, reaching a 52-week high of S$2.18 on 2 Jun 2017. The share price corrected by 22% from its 52-week high to a low of S$1.705 on 28 Jun 2017.
We believe that our target price of S$2.19 prices in current positives, with earnings growth at 11%/8% in FY18F/19F to be driven by improving gross profit margins arising from cost reduction.

Having adjusted our FY17-19F EPS forecasts upwards by 34-42% when we updated for the 1Q17 results’ improvement in gross profit margins (15% in 1Q17 vs. 13.6% in 1Q16 and 4Q16), we believe Sunningdale is unlikely to spring any further earnings surprises in FY17F.
Competition remains keen and management continues to highlight cost pressures as a risk.

Sunningdale has been an industry consolidator. In 2005, there it underwent merger with Tech Group Asia. In 2014, Sunningdale acquired a Singapore PIM company, First Engineering Ltd.
We believe there could be synergistic benefits if Sunningdale were to acquire Memtech. However, Sunningdale’s global manufacturing footprint, cash-generative operations (free cash flow positive in the past three years) and a major shareholder with a 16% stake could also be of interest to private equity firms, in our view.

Although Sunningdale has not issued any formal dividend guidance, we note that DPS has been increasing over the past three years; FY14 at S$0.04, FY15 at S$0.05, and FY16 at S$0.06.
We have assumed a dividend payout ratio of 42% for FY17F but we note that based on free cash flow cover, Sunningdale could afford to pay a higher dividend.
We believe growth opportunities such as possible acquisitions will take precedence in the dividend payout deliberation.

We have an Add call on Sunningdale with a target price of S$2.19, based on 1.11x FY17F P/BV (COE: 8.6%, zero growth).
Re-rating catalysts include better-than-expected cost management and new order wins.
Downside risks are order pushback by customers and unfavourable exchange rates.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-07-04

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