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

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%.

Global PIM company 

  • 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.

Has the share price peaked? 

  • 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.

Share price driver #1: Could FY17F spring an earnings surprise? 

  • 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.

Share price driver #2: Possible M&As 

  • 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.

Share price driver #3: Dividends 

  • 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.

Maintain Add 

  • 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 | 2017-07-04
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.190 Same 2.190