Sunningdale Tech Ltd - CIMB Research 2017-10-27: Building A Sustainable Business Model

Sunningdale Tech Ltd - CIMB Research 2017-10-27: Building A Sustainable Business Model SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - Building A Sustainable Business Model

  • Business conditions remain challenging for Sunningdale given the pricing pressure from customers and rising labour costs.
  • Volatile exchange rates also impacted profitability.
  • However, we believe Sunningdale will still enjoy the seasonality strength effect of the second half in FY17F.
  • Its Penang plant, which will help lower operating costs, is due to be completed by 1Q18.
  • As we roll over our valuation to FY18F, our target price rises to S$2.86.

Business conditions remain challenging 

  • In its 2016 Annual Report, Sunningdale’s Chairman commented that the global business environment is expected to remain subdued as rising economic uncertainties such as foreign exchange rate volatility continue to present challenges. China’s rapidly evolving economy has also led to rising labour costs for Sunningdale given its large manufacturing presence in China. Pricing pressure from customers and rising input costs are expected to persist in FY17, he said.

Stronger 2H 

  • As at end-Jun 2017, Sunningdale’s consumer/IT segment accounted for 48% of its injection moulding (IM) revenue while the automotive segment accounted for 44% of IM revenue. 
  • We expect Sunningdale to see a stronger 2H17F revenue as
    1. production of consumer/IT products is traditionally ramped up in the second half, and
    2. demand from existing projects in the automotive segment remains stable and the company is also benefitting from mass production runs from projects secured two years ago.

Unrealised FX impact 

  • About 50% of Sunningdale’s revenue is denominated in US$ terms and sales in China are billed in Rmb. In 2Q17, unrealised FX loss was S$2.6m. 
  • In 3Q17, on average, the US$ has weakened by 2.25% against the S$, the Rmb has weakened by 2.74% against the US$, and the S$ has weakened by 0.54% against the Rmb.

Staying cost-competitive 

  • Sunningdale has increased its automation efforts where it is cost effective to do so, to mitigate rising cost pressure. The group successfully completed the restructuring of its Zhongshan plant in China in 2Q16 and completed the construction of a 50,000 square metre mega site in Chuzhou in 4Q16. 
  • Sunningdale has also invested in a new manufacturing plant in Penang, Malaysia which will incorporate the latest precision engineering technology. The Penang plant is on schedule for completion in 1Q18F.

M&A growth not ruled out 

  • Given our forecast of S$798.4m in revenue by FY19F, we believe a S$1bn revenue target in the long term does not seem unreasonable. However, given Sunningdale’s limited organic revenue growth (it only added S$10m in revenue in FY16 versus FY15), acquisition is likely needed to reach this goal. 
  • We note that Sunningdale does have a history of acquiring peers (last acquisition was First Engineering in 2014).

Rolling over of valuation to FY18F 

  • We roll over our valuation base to FY18F. Our target P/BV of 1.36x (ROE: 10.5%, COE: 7.7%, zero growth) on FY18F book value per share of S$2.11 gives us a higher target price of S$2.86 upon rollover. 
  • We maintain our Add rating
  • Unfavourable exchange rates and a pull-back in customer orders remain key downside risks.

Gross margin could hit 16% 

  • We believe there is room for Sunningdale to further improve its gross profit margin, possibly to 16% over FY17-19F, as efforts to drive operating efficiency and streamline operations continue. Its new Penang plant, slated for completion in 1Q18, will also contribute to gross margin improvement over time.
  • We have conservatively assumed gross profit margin of 15%.0/15.2%/15.3% for FY17F/FY18F/FY19F. Gross margin in 1Q17/2Q17/1H17 was 15.0%/15.6%/ 15.3%. If 16% gross profit margin can be achieved in FY18F, our net profit forecast would be raised by 11.9% to S$45.3m versus S$40.5m on a 15.2% gross margin assumption.

William TNG CFA CIMB Research | 2017-10-27
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.86 Up 2.190