Sunningdale Tech Ltd - CGS-CIMB Research 2018-08-08: Watching Gross Margin Trend

Sunningdale Tech Ltd - CGS-CIMB Research 2018-08-08: Watching Gross Margin Trend SUNNINGDALE TECH LTD SGX:BHQ

Sunningdale Tech Ltd - Watching Gross Margin Trend

  • At 39% of our full-year forecast, we deem Sunningdale’s 1H18 net profit in line assuming 2H seasonality and US dollar strength holds.
  • A higher interim DPS of 3.0 Scts was declared (1H17: 2.5 Scts).
  • Key one-off items in 2Q18 results were S$3.8m FX gain and S$1.0m start-up loss at its new Penang plant.
  • We are concerned over the gross margin trend and have cut our FY18-20F gross margin assumptions. We subsequently cut our FY18-20 EPS forecasts and Target Price.
  • Maintain ADD. Our target price of S$2.05 (previously S$2.50) is based on 1.02x FY18 P/BV (previously 1.23x FY18 P/BV), as ROEs decline.




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1H18 net profit deemed in line assuming 2H strength

  • Given the seasonally stronger 2H and the current strength of the US dollar vs. the renminbi, ringgit and the Singapore dollar, Sunningdale’s 1H18 net profit at 39% of our full year forecast may still be deemed in line.
  • Our concern is the continued gross margin weakness. 2Q18 gross profit margin was 12.7%, similar to 1Q18 but still lower than the peak gross profit margin of 15.6% achieved in 2Q17.
  • Gross profit margin excluding the S$1.0m start-up loss at the new Penang plant was 13.1%.


Recurring net profit fell 33% y-o-y

  • Excluding the foreign exchange gain of S$3.4m and the start-up loss of S$1.0m at the Penang plant, Sunningdale’s 2Q18 recurring net profit fell 33% y-o-y to S$7.4m (2Q17:S$10.9m). The Consumer/IT segment continued to face end-of-life issues in the second quarter while new projects have yet to commence their production ramp up phase. This led to a 5.2% y-o-y revenue decline for this segment.
  • A higher interim DPS of 3.0 Scts was declared (2Q17: 2.5 Scts).


Outlook

  • Keys risks include
    1. volatile foreign exchange markets,
    2. rising labour costs, and
    3. the ongoing trade war.
  • Sunningdale has received business queries from both new and existing customers for projects on a global scale. The group will continue its strategy to further diversify its customer base and product mix.
  • Within the Consumer/IT segment, the group has made the strategic decision to shift from lower-margin projects to focus on high-margin, complex precision engineering parts.


Reassessing our gross profit margin assumptions

  • When we initiated coverage on Sunningdale in 2016, we assumed gross profit margins of 13.5% which Sunningdale subsequently managed to beat. Gross margin peaked in 2Q17 at 15.6% and seems to have stabilised at 12.7% in 1H18.
  • Given the current business dynamics, we are assuming a lower gross profit margin of 13.5% (average of 1Q14- 2Q18) for FY18. FY19-20F gross margin assumptions are also reduced.


Maintain ADD

  • Our target FY18F P/BV multiple falls to 1.02x (1.23x previously). Based on FY18F BVPS of S$2.01, our new Target Price is S$2.05.
  • We maintain our ADD call, with better cost management as a potential catalyst. Slowdown in customer orders is a downside risk.
  • Sunningdale’s 2Q18/1H18 revenue rose 2.4%/0.4% y-o-y. We opine that Sunningdale would need an acquisition to grow its revenue faster. Its last acquisition was First Engineering in 2014.





William TNG CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-08
SGX Stock Analyst Report ADD Maintain ADD 2.05 Down 2.500



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