Sunningdale Tech Ltd (SUNN SP) - DBS Research 2017-08-03: Earnings Gain Steam In 2Q17

Sunningdale Tech Ltd (SUNN SP) - DBS Vickers 2017-08-03: Earnings Gain Steam In 2Q17 SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd (SUNN SP) - Earnings Gain Steam In 2Q17

  • Sunningdale delivered a good set of results; earnings increased by 6.5% q-o-q and 115.3% y-o-y to S$8.2m in 2Q17.
  • Strong order momentum - especially for Consumer/IT segment - and efficiency gains were key drivers.
  • Capacity expansion and ongoing business development initiatives to pave the way for longer-term growth.
  • Proposed maiden interim dividend of 2.5 Scts.

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.

Valuation and recommendation. 

  • We have a BUY call on Sunningdale with TP of S$2.62, based on global peer average of 13x FY18F PE.

Lee Keng LING DBS Vickers | 2017-08-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.620 Same 2.620