Sunningdale Tech Ltd - CIMB Research 2017-05-15: Gross Margin Improvement Finally Came Through

Sunningdale Tech Ltd - CIMB Research 2017-05-15: Gross Margin Improvement Finally Came Through SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - Gross Margin Improvement Finally Came Through

  • At 36% of our forecast and 33% of consensus, Sunningdale's 1Q17 core net profit was above expectations.
  • Gross profit margin expanded to 15.0%, the highest since 1Q14.
  • Key one-off items in 1Q17 results were FX losses of S$2.1m and retrenchment costs of S$0.1m.
  • Management remains cautious on the outlook for FY17.
  • Maintain Add. Our target price is raised to S$2.19, based on 1.11x FY17 P/BV (previously 0.8x FY17 P/BV), as ROEs improve.

1Q17 above expectations 

  • 1Q17 core net profit was above expectations due mainly to the improvement in gross profit margin. The company was rewarded for its efforts to lower operating costs in FY16. 
  • The 1Q17 gross profit margin was 15.0% versus 13.6% in both 1Q16 and 4Q16.
  • Excluding S$2.1m in FX losses and S$0.1m in retrenchment costs, core net profit was higher at S$9.9m versus reported net profit of S$7.7m.

Automotive segment still a key driver 

  • Due to extensive marketing efforts (marketing and distribution expenses grew 15.5% yoy in 1Q17), all 3 business segments registered double-digit yoy revenue growth.
  • Automotive segment sales grew 14.7% yoy in 1Q17 while consumer/IT segment sales grew 10.7% yoy and healthcare segment sales grew 15.9% yoy. The automotive segment accounted for 39.2% of 1Q17 sales while the consumer/IT segment accounted for 38.4% of 1Q17 revenue.

Still cautious on outlook 

  • Management highlighted that the outlook is still uncertain and cost pressures remain.
  • The group will continue to drive down costs and improve efficiency. The group will also begin construction of a new manufacturing facility in Penang, Malaysia, with completion scheduled for the end of 1Q18. 
  • In addition, Sunningdale will progressively add capacity to its newest lower cost manufacturing plant in Chuzhou, China.

Maintain Add 

  • We raise FY17-19F core EPS forecasts by 33.5-42.2% as we adjust for gross margin expansion driven by the successful cost reduction initiatives. 
  • Downside risks remain unfavourable exchange rates and a pull-back in customers’ orders. 
  • We maintain our Add call with a higher target price of S$2.19, based on a 1.11x (ROE: 9.6%, COE: 8.6%, zero growth) FY17 P/BV multiple versus the previous 0.8x P/BV multiple as ROEs improve.

William TNG CFA CIMB Research | 2017-05-15
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.19 Up 1.560