Sunningdale Tech Ltd - CIMB Research 2017-11-09: Held Back By Unrealised Exchange Losses

Sunningdale Tech Ltd - CIMB Research 2017-11-09: Held Back By Unrealised Exchange Losses SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - Held Back By Unrealised Exchange Losses

  • Sunningdale Tech's 3Q17/9M17 sales were in line at 26%/75% of our full-year forecast.
  • Core net profit for 3Q17/9M17 came in below expectations (due to unrealised foreign exchange losses) at 21%/65% of our full-year forecast.
  • Adding back the unrealised exchange rate impact, 3Q17 net profit would have grown by 37.8% yoy instead of the headline 24.2% yoy decline.
  • Gross profit margin slipped to 14.32% in 3Q17 due to higher contribution from mould fabrication activities.
  • Our TP dips slightly to S$2.79 as we adjust for higher operating expenses in FY17.

3Q17 earnings below on unrealised exchange rate losses 

  • Sunningdale Tech's 3Q17 revenue grew by 9.1% yoy, driven by growth across all business segments, which helped the company to meet our expectations at 26% of our full-year forecast. However, reported net profit was below our expectation at 21% of our full-year forecast. 
  • Unrealised exchange losses amounted to S$3.1m in 3Q17 versus an unrealised gain of S$2.3m in 3Q16. 
  • Adjusting for the foreign exchange impact, adjusted net profit grew by 37.8% yoy.

Mould fabrication registered the strongest revenue growth 

  • The mould fabrication segment registered the strongest revenue growth in 3Q17 at 35.0% yoy, followed by the healthcare segment at 6.2% yoy, the consumer/IT segment at 5.6% yoy and the automotive segment at 2.5% yoy. 
  • As mould fabrication is a one-off business with no attendant injection moulding revenue and Sunningdale produces moulds for export and internal use, this could have led to a temporary dip in gross margin to 14.32% in 3Q17 versus the 15.0% achieved in 1Q17 and 15.6% in 2Q17.

Challenges remain 

  • Sunningdale guides that business sentiment remains subdued and the overall economic landscape continues to present the group with challenges across its global manufacturing operations. Foreign exchange rate volatility and rising labour costs persist, while the group continues to face pricing pressure from customers. 
  • The group will continue to focus its efforts on boosting productivity and enhancing operational efficiency to counter these challenges.

Cautiously optimistic outlook in FY18 

  • The group’s new manufacturing facility in Penang, Malaysia is scheduled to be completed by end-1QCY18. With new project wins from both new and existing customers, the group is also adding capacity at its latest manufacturing plant in Chuzhou, China. Sunningdale continues to receive business enquiries to handle projects from both new and existing customers. 
  • The group remains cautiously optimistic as it executes its strategy of building a sustainable and profitable business model for the long-term.

Maintain Add, with a lower target price 

  • Factoring in the higher operating expenses leads to a 2.9%-10.0% decrease in our core EPS forecasts. Our target P/BV multiple falls to 1.33x FY18F (versus 1.36x previously), reflecting the new ROE of 10.3% versus 10.5% previously. COE remains at 7.7% with zero growth assumption. On an FY18F BVPS of S$2.10, our new target price is S$2.79.
  • Maintain Add, with better cost management as potential catalysts. 
  • A slowdown in customer orders remains a key downside risk.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-11-09
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.79 Down 2.860