Sunningdale Tech (SUNN SP) - UOB Kay Hian 2018-04-25: 1Q18 Below Expectations, Hit By Weak Consumer/IT Segment And Unfavourable FX

Sunningdale Tech (SUNN SP) - UOB Kay Hian 2018-04-25: 1Q18 Below Expectations, Hit By Weak Consumer/IT Segment And Unfavourable FX SUNNINGDALE TECH LTD BHQ.SI

Sunningdale Tech (SUNN SP): 1Q18 Below Expectations, Hit By Weak Consumer/IT Segment And Unfavourable Foreign Exchange

  • Sunningdale Tech’s 1Q18 results were below expectations. Core net profit fell 25.5% y-o-y due to lower consumer/IT sales and a weaker US dollar.
  • Sunningdale saw unfavourable forex impact as headline net profit fell a whopping 74.8% y-o-y due to forex losses and gross margin dropped 2.3ppt. Forex volatility remains a major concern.
  • Maintain BUY with a lower PE-based target price of S$2.00.



RESULTS

1Q18 results below expectations.

  • Sunningdale Tech’s (SUNN) core net profit fell 25.5% y-o-y in 1Q18 due to weaker sales in the consumer/IT segment and forex impact on sales. 
  • Group sales fell 1.6% y-o-y, driven by a 12.2% y-o-y drop in consumer/IT sales. 1Q17 was also an exceptionally strong quarter for the consumer/IT segment as Sunningdale received advanced orders from customers looking to ramp up production. 1Q18 saw some consumer/IT projects come to completion while there were also some delays in production ramp-up from other customers due to macroeconomic uncertainty. 
  • Feb 18 was a poor month for the group due to the 2-week-long Chinese New Year holidays in China but we understand that customer demand has picked up in March. 
  • The automotive and healthcare segments saw modest y-o-y sales growth of 2.9% y-o-y and 3.1% y-o-y respectively.

Strong balance sheet and cash flow.

  • Sunningdale’s balance sheet and cash flow remained healthy with cash and cash equivalent of S$105m vs debt of S$106.5m. The group is in a good financial position should M&A opportunities arise to strengthen its geographical presence or open up new customer opportunities. 
  • The group continues to generate strong despite a weak quarterly performance.


STOCK IMPACT


Consumer/IT segment should see ramp-up in 2H18.

  • Management expects a ramp-up in the consumer/IT segment in 2H18 as we understand that the group is currently working with certain customers on orders for the next generation of consumer/IT products. 
  • Due to production ramp-up delays in 1Q18 for some customers, we expect the production ramp-up to occur in 2Q-3Q18 as the group’s orderbook for the year remains strong.

Highly susceptible to forex volatility.

  • Sunningdale said that if exchange rates for 1Q18 had been the same as in 1Q17, the group would have recorded revenue of S$173m (+2.6% y-o-y) and a higher gross margin of 14%. The group continues to be a victim of the greater-than-average fluctuations in the key operating currencies, namely the US dollar, the renminbi and the ringgit. 
  • Sunningdale does not engage in hedging and we expect this practice to continue despite the large forex losses. Rather, the company engages customers in negotiation when prices or exchange rates change significantly which creates a certain time lag between price adjustments.

Poor utilisation in 1Q18.

  • Gross margin fell to 12.7% for 1Q18 due to a weak February which resulted in lower utilisation. We expect gross margins to normalise back to the 14% level going into 2Q18 as utilisation had picked up in Mar 18.

Management still confident of 2018 outlook.

  • Apart from forex volatility, management is still fairly confident of the group’s prospects for the remainder of 2018. 
  • Order backlog for the group remains stable with consistent queries from new and existing customers. 
  • Construction for the Penang plant has been completed and pilot runs for mass production of consumer/IT products are underway with ramp-up scheduled for 2H18.


EARNINGS REVISION/RISK

  • We slash our net profit estimates for 2018-20 by 24%, 16% and 14% respectively as we lower our growth rate assumptions for every segment and our gross margin assumptions. 
  • Our blended revenue growth rate is reduced from 5% to 3.5% for 2018.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower PE-based target price of S$2.00, pegged to peers’ average 2018F PE of 11.9x. 
  • Our target price is in line with Sunningdale’s net asset value of S$1.98/share as of 1Q18.


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/ 2018-04-25
SGX Stock Analyst Report BUY Maintain BUY 2.00 Down 2.510



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