Sunningdale Tech (SUNN SP) - UOB Kay Hian 2018-02-23: 4Q17 Core Results In Line; Building For The Long Term

Sunningdale Tech (SUNN SP) - UOB Kay Hian 2018-02-23: 4Q17: Core Results In Line; Building For The Long Term SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech (SUNN SP) - 4Q17: Core Results In Line; Building For The Long Term

  • Sunningdale’s 4Q17 results are in line with expectations. Core net profit grew 8.1% yoy, led by growth from all four segments. 
  • The group saw unfavourable forex impact as headline net profit fell a whopping 64% y-o-y due to a weaker US dollar and the absence of disposal gains in 4Q17. Operations are in the pink of health but due to the absence of hedging practices, the company is susceptible to forex volatility.
  • Maintain BUY and PE-based target price of S$2.51.



RESULTS


4Q17 results within expectations. 

  • Sunningdale Tech’s (SUNN) core net profit came in 8.1% higher y-o-y, driven mainly by sales growth from all of its four business segments (automotive, consumer, healthcare and mould fabrication). 
  • Due to additional orders from both new and existing customers, revenue from the automotive, consumer and healthcare segments grew 7.5%, 4.3% and 6.6% y-o-y in 4Q17. Gross margins continued to tick up as the group strives to further automate processes and reduce the reliance on labour.

Strong balance sheet and cash flow. 

  • Sunningdale Tech generated strong positive operating cash flow of S$36.3m in 4Q17. Despite constructing a new factory in Penang, Malaysia, in mid17, balance sheet remained robust with net cash of S$1.6m as of end-17. 
  • The company is well-positioned to capitalise on organic or inorganic opportunities that may arise. Sunningdale Tech is on the lookout for M&A opportunities that may open up new customers, sectors or geographies.

Final dividend of 4.5 S cents, above expectations. 

  • Sunningdale Tech declared a final dividend of 4.5 S cents, bringing full-year dividends to 7.0 S cents, above our expectation of 6.5 S cents. Going forward, we expect dividends to continue to rise as the group has been raising its dividends since 2013.


STOCK IMPACT


New plant in Penang. 

  • Sunningdale Tech will open a new 15,000sqm manufacturing plant in Penang, Malaysia, by end-1Q18. We estimate this could add at least 10-15% in new machine capacity which is likely sufficient to cater to new customers’ orders for the next 2-3 years. 
  • As many of Sunningdale Tech’s customers have a presence in Penang, Sunningdale Tech will shift some of the production from the Johor and Singapore plants which are running at maximum capacity to save on logistical costs.

Highly susceptible to forex volatility. 

  • In 2017, Sunningdale Tech was hit by a forex loss of S$10.6m due to a weaker US dollar against the renminbi, Singapore dollar and ringgit.
  • Sunningdale Tech does not engage in hedging practices but undertakes negotiations with customers should the US dollar weakens or strengthens against domestic currencies.

Expect gross margins to trend upward. 

  • Going forward, we expect gross margins to rise as the group continues to automate processes and move into the manufacturing of higher- margin and more complex components.


EARNINGS REVISION/RISK

  • No change to our earnings estimates. We introduce 2020 net profit forecast of S$45.7m.


VALUATION/RECOMMENDATION

  • Maintain BUY and PE-based target price of S$2.51, pegged to peers’ average 2018F PE of 11.4x.


SHARE PRICE CATALYST

  • Potential privatisation.
  • Expansion into new precision engineering segments.




Nicholas Leow UOB Kay Hian | Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.510 Same 2.510



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