Sunningdale Tech Ltd - CIMB Research 2018-02-22: Ignore The FX Noise

Sunningdale Tech Ltd - CIMB Research 2018-02-22: Ignore The FX Noise SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech Ltd - Ignore The FX Noise

  • Sunningdale Tech's 4Q17/FY17 sales were in line at 26%/101% of our full-year forecast.
  • However, core net profit for 3Q17/FY17 came in below expectations (due to foreign exchange losses) at 24%/92% of our full-year forecast.
  • Excluding the exchange rate impact, 4Q17 net profit still declined by 19.1% y-o-y, compared to the reported 64.0% y-o-y decline.
  • Gross margin slipped to 13.4% in 4Q17 (3Q17:14.3%) due to negative exchange rate impact and lower average selling prices.
  • Our Target Price rises slightly to S$2.82, based on a higher FY18F P/BV of 1.374x (1.33x previously).

4Q17 earnings below due to exchange rate losses 

  • 4Q17 revenue rose 1.6% y-o-y, driven by growth across all business segments except the consumer/IT segment. This segment’s revenue fell 7.7% y-o-y in 4Q17 as customers brought forward their orders scheduled for 4Q17 to earlier quarters and the average selling prices for certain projects were lowered as customers switched to cheaper materials. 
  • Sunningdale reported net profit of S$7.7m in 4Q17. Excluding the foreign exchange losses of S$2.8m, 4Q17 adjusted net profit was S$10.6m. 

Mould fabrication registered the strongest revenue growth in 4Q17 

  • The mould fabrication segment continued to register strongest revenue growth in 4Q17 at 14.1% y-o-y (3Q17: 35.0% y-o-y), suggesting that Sunningdale is still enjoying good demand from customers. This is corroborated by the increase in inventories y-o-y in 4Q17, as Sunningdale stocks up ahead of new project launches by customers. 
  • The short-term rise in mould fabrication revenue is one of the reasons for the lower gross margin of 13.4% in 4Q17 (vs.14.3% in 3Q17 and 13.6% in 4Q16).

Challenges remain 

  • Sunningdale guides that business sentiment remains subdued and the overall muted 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 plans to continue focusing its efforts on boosting productivity and enhancing operational efficiency to counter these challenges.

Cautiously optimistic earnings outlook for FY18F 

  • The group’s new manufacturing facility in Penang, Malaysia is scheduled to be completed by end-1QCY18F. With new project wins from both new and existing customers, the group has also added incremental capacity at its latest manufacturing plant in Chuzhou, China. 
  • The group remains committed to its strategy of building a sustainable and profitable business model for the long-term. Sunningdale stated that it is also willing to pursue M&As to expand its business further.

Maintain ADD and raise target price slightly 

  • We moderate our gross margin assumption, leading to a 0.6% decrease in core FY18F EPS forecast. However, our FY19F EPS rises by 1.1% due to a lower estimate for other operating expenses. 
  • Our target FY18F P/BV rises to 1.374x (1.33x previously). We also raise FY18F COE to 8.0% (7.7% previously), assuming 4% risk-free rate (3% previously).
  • Based on FY18F BVPS of S$2.05, our new Target Price is S$2.82. Maintain ADD, with better cost management as a potential catalyst. Slowdown in customer orders is a downside risk.

William TNG CFA CIMB Research | 2018-02-22
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 2.82 Up 2.790