Sunningdale Tech Ltd - CIMB Research 2016-10-28: Business environment still challenging

Sunningdale Tech Ltd - CIMB Research 2016-10-28: Business environment still challenging SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - Business environment still challenging

  • We deem 9M16 core net profit as in line at 75% of our full-year forecast.
  • 3Q16 revenue was driven by automotive segment. Gross margin continued to improve qoq on the back of better product mix and cost efficiencies.
  • 3Q16 was positively impacted by an exchange gain of US$1.6m.
  • Management has a cautious outlook for 4Q16 but expects production for automotive customers to ramp up.
  • Maintain Add; target price raised as we roll over to FY17F P/BV.

In-line 9M16 results 

  • We deem 9M16 core net profit as in line with expectations at 75% of our full-year forecast. 
  • Revenue growth remained constrained, with 3Q16 sales falling 2.3% yoy while 9M16 sales grew just 0.8% yoy. 
  • Adjusting for foreign exchange gains, net profit grew 49% yoy versus the 36% yoy decline in reported net profit. 
  • On a positive note, the gross margin has been seeing improvement qoq (1Q16: 13.6%, 2Q16: 13.8%, 3Q16: 14.2%).

Automotive segment still key driver 

  • The automotive segment continued to be the only segment with strong revenue growth.
  • 3Q16 revenue growth for this segment was 7.0% yoy, driven by increased orders from new and existing customers. Sunningdale guided that its order backlog for this segment remained robust. 
  • Revenue in the healthcare segment fell 8.8% yoy but Sunningdale guided that production was expected to ramp up in 4Q16 following a key customer’s shift in production from 3Q16 to 4Q16.

Outlook still cautious 

  • The company’s outlook remains cautious. Management noted that global growth stayed subdued while key challenges cited were 
    1. cost pressures from higher wages in Asia, and 
    2. pricing pressure from customers. 
  • The company’s cost reduction effort with a new manufacturing plant in Chuzhou, China, which will be completed by end-2016, remained on track. Its global manufacturing footprint is also attracting customers who are interested in suppliers that can handle projects across different geographies.

Maintain Add 

  • We lower FY16-18F core EPS by between 1.9% and 8.0% as we fine tune our expense forecasts, adjust for FX gain and assume lower sales growth on challenging outlook.
  • The completion of the construction of the Chuzhou plant will help mitigate cost pressure from FY17F onwards. 
  • Downside risks remain unfavourable exchange rates and pullback in customers’ orders. 
  • Maintain Add with a TP of S$1.51 as we roll over to FY17F, based on an unchanged 0.8x (ROE: 6.8%, COE: 8.6%, zero growth) P/BV multiple.

William Tng CFA CIMB Research | 2016-10-28
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.51 Up 1.440