Sunningdale Tech (SUNN SP) - Maybank Kim Eng 2017-07-19: Plastic Fantastic

Sunningdale Tech (SUNN SP) - Maybank Kim Eng 2017-07-19: Plastic Fantastic SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech (SUNN SP) - Plastic Fantastic


Industry leading capabilities with a global footprint 

  • Sunningdale Tech (SUNN) is one of the leading precision plastics engineering companies in Asia. It has an extensive manufacturing presence worldwide (currently in 19 sites across nine countries in Asia, Europe, N. America, S. America and a new plant in Malaysia in the pipeline) serving a long roster of clients, many of them prominent MNCs in their respective sectors. 
  • Management has a cautiously optimistic growth outlook despite the pricing and cost pressures faced by the industry.


Strong core competencies; diversified exposure 

  • SUNN’s customer exposure is quite diversified as the top 30 customers account for 80% of revenue (and top 10 make up 50%). Management believes its key competitive advantages are: 
    1. it’s one of the few firms with manufacturing presence outside Asia; 
    2. precision engineering capabilities built over three decades; 
    3. a very diversified product offering that mitigates demand volatility in a specific product; and 
    4. tooling expertise that is instrumental in driving levels of automation.


FY17 growth driven by automotive 

  • Amongst SUNN’s four business segments, management expects automotive (39% of 1Q17 revenue) to be the key growth driver for FY17.
  • New projects have lifted the consumer/IT segment (38% of revenue) from its 1Q16 bottom, and the segment is expected to deliver modest revenue gains for the rest of the year. 
  • Healthcare is currently small (8% of revenue) and SUNN aims to increase its customer base and product offerings in this segment. 
  • Mould fabrication (14% of revenue) has been performing poorly for the past few quarters due to structural trends and weakness from one customer. SUNN is undertaking various initiatives, like trimming excess capacity and increasing automation to boost gross margins (11.6% in FY13 to 13.8% in FY16; 1Q17 15%). 
  • Medium-term growth plans may include M&A with management comfortable with ticket sizes of cSGD200m.



Company Profile 


Business 

  • SUNN is a precision plastics company with 19 production sites span across nine countries, over Asia, Europe, as well as North and South America.
  • Products classified into four main customer segments: automotive, consumer/IT, healthcare and mould fabrication. Examples of products in these segments: 
    1. Automotive: Mostly a tier-2 supplier for products such as console panels and keys etc. for customers such as Bosch, Continental and Valeo.
    2. Consumer/IT: Products suite ranges from computer peripherals (e.g. printer cartridges for HP) to personal grooming devices as well as entertainment/ home appliances devices for market leading brands.
    3. Healthcare: Products include drug delivery systems, as well as DNA sequencing and intravenous accessories.
    4. Mould fabrication for external customers, as well as own use.

Company milestones 

  • Founded in 1984 as Sunningdale Precision Industries by Dr. Ng Boon Hoo.
  • Merged with Tech Group in 2005 to become Sunningdale Tech. By this time, the group already has presence outside Asia (in Mexico).
  • Expanded to Brazil and Indonesia (Batam) in 2013.
  • Acquired First Engineering in 2014. Also expanded manufacturing presence to Thailand in the same year.
  • Completed restructuring exercise in Zhongshan to streamline costs and boost utilisation in 2016.
  • 50,000 sqm Chuzhou plant completed in 4Q16. Penang facility to be completed in 1Q18.


Investment Pros and Cons 


The growth proposition 

  • Growth in automotive segment is leveraged to: 
    1. global outsourcing trends; 
    2. shift towards more in-car plastic components; and 
    3. new product projects.
  • Growth in consumer/IT segment is a beneficiary of recovery in global consumption witnessed since mid- 2016, as well as from new projects.
  • However, mould fabrication business is in decline from structural trends – e.g. in-vehicle parts being standardised across models.

The value proposition 

  • Competitive advantage from large and diversified presence, e.g. ability to scale and standardise a product for an MNC customer across regions.
  • Trading at 10.4x FY17 consensus vs c14.4x for its Singapore listed peer basket (and 17.2x for the MSCI Singapore Small Caps Index).
  • Has been steadily increasing DPS, doubling from 3 cts in FY12 to 6 cts in FY16.

Key Risk Factors 

  • The automotive segment may be vulnerable to increasing risks in the global car market, such as slowing sales growth, Brexit risks to UK-based auto manufacturing, and increasing localisation trends in western markets, etc.
  • The consumer/IT segment is exposed to end-demand risk affected by economic cycles and levels of discretionary consumer spending.
  • Investment/ Expansion Missteps: SUNN has in the past been prudent with its geographic expansion as investments at new sites are typically customer-led along with potential to win additional clients at the location. Over expansion and/or political/policy risks of the market are inherent with new plants.
  • Pricing pressure given industry overcapacity in markets like China.
  • Cost pressures from input cost volatility. Resin is SUNN’s largest input cost component. The company mitigates this risk with contracts that incorporate re-pricing flexibility should input commodities and foreign exchange fluctuate beyond bands specified in the contract.


Peer Valuation Comparison

  • SUNN is trading at 10.4x consensus P/E. Based on three estimates, the street is forecasting c8% YoY growth in SUNN’s core EPS to SGD0.183 in FY17.
  • The stock is trading at c28% discount to its Singapore peer basket of EMS and precision engineering companies, which trade at c14.4x on earnings growth expectations of c21%.


NOT RATED
Target Price: N/A




Neel Sinha Maybank Kim Eng | Lai Gene Lih Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-07-19
Maybank Kim Eng SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998



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