Sunningdale Tech Ltd - DBS Research 2017-11-09: Look Beyond Forex Loss

SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - Look Beyond Forex Loss

Record sales of S$188.1m but earnings disappoint.
Forex volatility was the main drag on earnings, which fell 6% q-o-q to S$7.7m.
We estimate core earnings was closer to S$10.8m, flat q-o-q.
Maintain BUY with TP of S$2.70; FY17F earnings lowered to S$32.8m after imputing forex losses.

While headline profit of S$7.7m for 3Q17 came in below expectations (mainly on foreign exchange losses), sales momentum remained on strong upward trajectory, +6% q-o-q to a record S$188.1m.
Mould Fabrication posted the strongest growth, and this may have positive implications for the group as historical trends suggest that some of these could potentially be converted into commercial contracts for the group later on.
Overall, we still like Sunningdale for its advanced manufacturing capabilities, global manufacturing footprint, and scale. While we have lowered FY17F earnings by c.9% after imputing forex losses, we remain cautiously optimistic of the group’s FY18F outlook given positive underlying trends and recent contract wins.

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

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 improvements 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.

Offering a lower risk-reward profile vs local peers and higher growth vs the bigger boys in the US, our TP at S$2.70, based on global average of 13x FY18F PE, is fair.
Dividend yield of 2.7% could surprise on the upside as dividends have been on a steady uptrend in FY14-FY16.

Global economic slowdown could pose significant challenges to Sunningdale, especially in Consumer/IT and Automotive.

Sales momentum strengthened in 3Q17, gaining c.6% q-o-q to a record S$188.1m. Bulk of sales growth was mainly from higher contributions from Mould Fabrication at c.S$36m (+25.6% qo-q) vs S$28.6m in 2Q. Historical trends suggest that some of these could potentially be converted into new Consumer/IT, Automotive and/or Healthcare contracts for the group later on.
Of the core segments, Consumer/IT was the best-performing, growing 8.3% q-o-q to S$76.9m and offsetting modest declines in the Automotive and Healthcare segments of c.3.5% and 3% q-o-q to S$63.2m and S$12.1m, respectively.

Earnings declined by c.6% q-o-q to S$7.7m (from S$8.2m in 2Q), mainly as volatile foreign exchange environments for the USD/MYR and USD/CNY resulted in foreign exchange losses of c.S$3.1m. The USD/MYR and USD/CNY closed 1.7% and 1.9% lower at the end of 3Q, and fell by up to 2.5% and 4.3% during the quarter.
Excluding the forex impact, we estimate that core earnings would have been closer to S$10.8m vs headline number of S$7.7m and essentially flat q-o-q but +36.8% y-o-y.

Gross margins also came off from 15.6% in 2Q17 to 14.3% in 3Q17 as the group saw higher contributions from its lower margin Consumer/IT segment and skewed by strong Mould Fabrication sales - for which margins can vary widely on a q-oq basis depending on the stage of completion of underlying tooling projects.
On a 9M basis, gross margins remained healthy at c.15%, in line with our assumption for FY17F.

While 3Q17 headline numbers were slightly disappointing, we are comforted by Sunningdale’s strong sales momentum and positive business developments
We have lowered our earnings forecast for FY17F by c.9% to S$32.8m (vs S$36.2m) after imputing foreign exchange losses, but have maintained our projections for FY18F as we remain cautiously optimistic of Sunningdale’s ability to delivery steady growth given positive underlying demand trends, growing capacity and ramp-up on new project wins from both new and existing customers.

Carmen TAY DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-11-09

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.700 Same 2.700