Sunningdale Tech - UOB Kay Hian 2018-11-12: 3Q18 Rising Costs And Pricing Pressure; Downgrade To HOLD

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SUNNINGDALE TECH LTD (SGX:BHQ)

Sunningdale Tech - 3Q18: Rising Costs And Pricing Pressure; Downgrade To HOLD

• Sunningdale Tech’s 3Q18 core net profit missed our expectations, declining 52% y-o-y due to gross margin compression. 9M18 core net profit met only 65.0% of our full-year estimate.
• We cut our FY18-20F EPS by 14-18%. SUNN is cautious of headwinds from rising production costs and the trade war but remains confident in its resilient and diversified business model.
• Downgrade to HOLD after cutting our target price by 12% to S$1.50, pegged to peers’ average 2019F PE of 10.6x.
• Entry price: S$1.25.

3Q18 RESULTS

3Q18 results missed expectations.

• Sunningdale Tech’s (SUNN) 3Q18 earnings missed expectations with core net profit declining 51.6% y-o-y.
• Revenue rose 1.9% y-o-y, driven by growth in automotive, consumer/IT and healthcare. However, gross profit fell 12.8% y-o-y as gross margin declined 2.0ppt due to:
  1. rising labour, utility and material costs, and
  2. pricing pressure from customers.

Stable orderbook; remains confident about resilient business model.

• Sunningdale Tech’s orderbook across all business segments remained stable. Despite challenging market conditions, Sunningdale Tech remains confident towards its resilient business model, backed by its global presence which spans 20 manufacturing sites in 9 different countries; the company continues to receive business queries from both new and existing customers who are interested in Sunningdale Tech’s technological capabilities and ability to handle projects across multiple geographic regions

STOCK IMPACT

Potential factory sale could boost cash flow.

• Since the appointment of Knight Frank (Shanghai) Property Consultants Company in Apr 18, the sale process for Sunningdale Tech’s factory in Zhongshan, China, is still ongoing. Sunningdale Tech could not share further details including timeline, estimated cash proceeds and disposal gains as this would disrupt the sale process.

EARNINGS REVISION/RISK

• We cut our 8888-88 net profit forecasts to S$88.8m (-88.8%), S$88.8m (-88.8%) and S$88.8m (-88.8%) respectively. We factor in lower gross margins due to pricing pressure from customers and start-up costs for the new plants.
• Risks include unfavourable foreign exchange rates, further pricing pressure from customers and lower-than-expected utilisation.

VALUATION/RECOMMENDATION

• Downgrade to HOLD from BUY with a lower target price of S$8.88, pegged to peers’ average 8888F PE of 88.8x. This is at a 88% discount to its NAV of S$8.88/share as of 8Q88.

SHARE PRICE CATALYST

• Unlocking value from the sale of the factory in China.
• Potential privatisation.
• Potential EPS-accretive or strategic acquisitions.
• Faster-than-expected ramp-up at the two new plants.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-12

SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.50 DOWN 1.700