Sunningdale Tech Ltd - DBS Research 2017-08-04: Steady Long-term Play

SGinvestors.io

SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - Steady Long-term Play

• Order growth and margin expansion are key earnings drivers.
• M&A could drive re-rating of share price.
• Inaugural interim dividend of 2.5 Scts sends positive signal, reaffirming our view on the company.
• Reiterate BUY with higher TP of S$2.70 after raising margin assumptions slightly.

Leading manufacturer of precision plastic components. 

• Ranked among the largest high-precision plastic solution providers globally, Sunningdale’s competitive advantages lie in its advanced manufacturing capabilities, global manufacturing footprint, and scale. 
• The group also stands out for its diversified product and MNC customer base – majority of its customers each contribute 3-5% to group sales, which greatly reduces concentration risk commonly seen among small-mid cap peers.

What's New

Delivered remarkable 115% y-o-y earnings growth, but focus on steady q-o-q performance instead. 

• Sunningdale’s earnings more than doubled y-o-y from S$3.8m in 2Q16 to S$8.2m in 2Q17 on a 6.5% increase in sales, which was impressive. 
• As the pick-up in order momentum and earnings were already in force from 3Q16, we focus on q-o-q (+6.5% from S$7.7m in 1Q17) performance instead, which better reflects Sunningdale’s operating performance and its quality as a sustainable growth play.

2Q16 earnings were negatively skewed by one-off restructuring costs of S$4.8m (partly offset by forex gain of S$1.5). 

• Stripping out the impact of forex and one-offs, we estimate that net profit would have been closer to S$7m/s$9.8m/S$10.9m in 2Q16/1Q17/2Q17, respectively.
• Strong order momentum and a margin boost from greater operational efficiency were key drivers. Consumer/IT was the best performing segment, growing 7.8% q-o-q and contributing c.40% of 2Q17 sales (or S$71m). Sales to the Automotive sector dipped slightly (-2.7% q-o-q), after having grown for at least ten consecutive quarters, but remains a substantial contributor to the group at c.37% of the quarter’s sales.
• Apart from the uptick in sales (+3.4% q-o-q), the good set of results were also underpinned by productivity gains, as the streamlining of operations and ongoing efficiency initiatives have yielded some results, which led to gross/operating margin expansion from 15%/5.1% in 1Q17 to 15.6%/5.9% in 2Q17.

Capacity expansion to pave the way for longer-term growth.

• Construction of the group’s new manufacturing plant in Penang (Malaysia) is still underway but remains on track for completion by end-1Q18. 
• Additionally, in anticipation of future growth and capacity requirements, Sunningdale will also add capacity to its latest manufacturing plant in Chuzhou (China) progressively, which will allow the group to take on more Automotive and Consumer/IT projects later on. 
• As Sunningdale continues to execute on the above, it should incur higher capex of c.S$35m for FY17F, compared to the historical average of S$25m p.a..

Earnings momentum to strengthen heading into the seasonally stronger second half. 

• The second half is typically stronger for Sunningdale and should remain so for FY17F, particularly for the Consumer/IT segment in the upcoming 3Q (and possibly 4Q), where demand tends to be the strongest leading up to the year-end gifting season.

Proposed maiden interim dividend of 2.5 Scts. 

• Sunningdale proposed a maiden interim dividend of 2.5 Scts (vs 6 Scts for FY16) , which will go ex on 22 Aug 2017, and paid on 31 Aug 2017. 
• Given YTD earnings of S$15.9m vs S$7.4m a year ago, we think dividend payout for FY17F could surprise on the upside.

Where we differ: 

• We believe that Sunningdale’s world-class engineering capabilities, global presence and diversification are under-appreciated, and deserves to at least trade at global average of 13x FY18F PE vs consensus’ average of 11x.

Potential catalysts: 

• Sunningdale’s share price should re-rate as it delivers steady earnings growth or value-accretive acquisitions. 

Positive underlying trends and strong fundamentals underpin steady growth outlook. 

• Sunningdale has delivered consistent margin improvement and growth over the last few years.
• Ahead, several underlying trends such as
  1. the broad-based substitution from metallic to plastic components in a wide range of industrial applications – particularly in the automotive, consumer goods and healthcare sectors, and
  2. favourable demand outlook across the group’s three key end-sectors, indicate longer-term potential.
• As the group grows capacity, ramps up production and strengthens business development efforts to ride these positive trends and unlock greater economies of scale, we project core earnings to grow at an 11% CAGR over FY16-18F.

Valuation

Reiterate BUY with a higher TP of S$2.70, based on 13x FY18F PE. 

• Offering a lower risk-reward profile vs local peers and higher growth vs the bigger boys in the US, we see our TP of S$2.70, based on global average of 13x FY18F PE, as fair.
• Dividend yield of 2.9% could surprise on the upside as dividends have been on a steady uptrend over FY14-FY16.

Key Risks to Our View

• Global economic slowdown could pose significant challenges to Sunningdale, especially for its Consumer/IT and Automotive segments

Carmen TAY DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-08-04

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.70 Up 2.620