Sunningdale Tech - UOB Kay Hian 2018-05-28: Trading At Rock Bottom Valuations With Attractive Yield; Re-iterate BUY

Sunningdale Tech - UOB Kay Hian 2018-05-28: Trading At Rock Bottom Valuations With Attractive Yield; Re-iterate Buy SUNNINGDALE TECH LTD SGX: BHQ

Sunningdale Tech - Trading At Rock Bottom Valuations With Attractive Yield; Re-iterate Buy

  • Post 1Q18 results, Sunningdale’s share price has retraced significantly. We believe that the correction is overdone and the stock is trading at rock bottom valuations with an attractive yield.
  • Sunningdale has appointed a broker in an effort to dispose of a factory in China which may unlock some value for the group. With insiders buying Sunningdale at much higher levels, current levels offer an excellent opportunity to pick up the shares.
  • Maintain BUY with target price of S$2.00.



WHAT’S NEW


Share price correction overdone.

  • Post 1Q18 results, Sunningdale Tech’s (Sunningdale) share price has retreated by more than 23%. We believe that the correction is overdone and at current levels, the stock is trading at very attractive valuations of 0.6x 2018F P/B and 7.8x 2018F P/E with other plastic injection moulders such as Memtech International trading at close to 1.1x 2018F P/B and 11.0x 2018F P/E. 
  • Sunningdale does not deserve to be trading at a discount to peers given:
    1. global presence which allows for proximity to customers;
    2. willingness to reward minority shareholders;
    3. high exposure to the automotive sector; and
    4. clear exit strategy with Mr Koh Boon Hwee as Executive Chairman.
  • The company has consistently rewarded minority shareholders with an increasing dividend since 2013 where dividends rose from 3.5 S cents /share to 7.0 S cents /share in 2017. With the potential for asset disposal this year, we do not expect any deviation and are confident of Sunningdale paying a full year dividend of 7.5 S cents /share for 2018.


Appointment of broker to dispose of factory in China.

  • Sunningdale has restructured a factory in Zhongshan China and appointed Knight Frank (Shanghai) Property Consultants Company as its exclusive brokerage team to dispose of the factory. The factory is a non-core asset and Sunningdale continues to maintain its operations at Zhongshan through its other factory in the prefecture.
  • We understand that the factory is fairly sizeable and with recent industrial land selling for between Rmb600-1,500/sqm, Sunningdale should net a decent gain from the disposal of the factory. The factory has been part of the Sunningdale group for a long time as we believe that the holding company Chi Wo Plastic Moulds was acquired by Sunningdale in 2005.
  • The disposal of the factory should act as a catalyst for the stock post the disappointing 1Q18 results.


Appreciating US dollar should stabilise forex losses.

  • With the US dollar appreciating against the Singapore dollar, renminbi and ringgit since 30 Mar 18, we do not rule out the possibility of Sunningdale reporting a forex gain for 2Q18 should the US dollar continue to strengthen or hold at current levels after more than 4 consecutive quarters (1Q17 to 1Q18) of forex losses.


STOCK IMPACT


Trading at levels significantly below insiders’ last purchase price.

  • On 13 Apr 17, Mr Koh Boon Hwee bought almost 13m Sunningdale shares at about S$1.71/share. With the stock trading at about a 23% discount to Mr Koh’s last purchase price, we believe investors should see significant value to Sunningdale at this level.

Management still confident on outlook for 2018.

  • Apart from foreign exchange volatility, management is still fairly confident on the prospects of the group for the remainder of 2018. The 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 in the consumer/IT are underway with ramp-up scheduled for 2H18.


EARNINGS REVISION/RISK

  • No change to our earnings estimates.


VALUATION/RECOMMENDATION

  • Maintain BUY with a PE-based target price of S$2.00 pegged to peers’ average 2018F PE ratio of 11.9x. 
  • Our target price is in-line with Sunningdale’s net asset value which stands at 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 | https://research.uobkayhian.com/ 2018-05-28
SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000



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