Sunningdale Tech - UOB Kay Hian 2019-03-01: 2018 Earnings Miss; Expect Improvement In 2H19

SGinvestors.io

SUNNINGDALE TECH LTD (SGX:BHQ)

Sunningdale Tech - 2018 Earnings Miss; Expect Improvement In 2H19

• 2018 core net profit missed our estimate by 12%, declining 50% y-o-y due to gross margin compression from cost and pricing pressures. Sunningdale Tech expects its new Penang plant to ramp up and the Chuzhou plant to complete its shifting only in 2H19.
• We cut our 2019-20 EPS forecasts by 16-17%, and our target price by 13% to S$1.30, pegged to peers’ average 2019F PE of 11x.
• Maintain HOLD. Entry price: S$1.20.

2018 RESULTS

2018 results missed expectations.

• SUNNINGDALE TECH LTD (SGX:BHQ)’s 2018 earnings missed expectations with core net profit declining 50% y-o-y. Revenue rose 0.3% y-o-y, driven by automotive and healthcare. However, gross profit fell 17.4% y-o-y as gross margin declined 2.6ppt due to:
  1. rising labour and utility costs,
  2. pricing pressure from customers, and
  3. lower manufacturing yield from new projects during the initial ramp-up phase.
• Furthermore, Sunningdale Tech was impacted by a slowing automobile market as global automobile sales declined.

Two new plants affected operations, expect improvement in 2H19.

• First, in its new Penang plant, utilisation was low as the plant is still in its start-up phase. Sunningdale Tech expects production and utilisation at this facility to ramp up in 2H19 from new projects secured.
• Second, there were delays in the shifting of operations and machinery from its facilities in Shanghai to its mega site in Chuzhou due to delays in approvals from certain customers, which led to additional costs. Sunningdale Tech expects completion of this shift in 3Q19 as it continues to optimise resources in China.

Remains confident of its resilient business model.

• Despite challenging market conditions, Sunningdale Tech remains confident of its resilient business model, backed by its global presence which spans 20 manufacturing sites in 9 countries.

STOCK IMPACT

Could pick up only in 2H19.

• As the new Penang plant and shifting to Chuzhou mega plant are only expected to ramp up and complete in 2H19, we expect Sunningdale Tech’s performance to only start improving at that point.

EARNINGS REVISION/RISK

• We cut our 2019-20 net profit forecasts to S$22.6m (-16%) and S$23.2m (-17%) respectively. We factor in lower gross margins due to pricing pressure from customers and start-up costs for the new plants.
• Risks include unfavourable forex rates, further pricing pressure from customers and lower-than-expected utilisation.

VALUATION/RECOMMENDATION

• Maintain HOLD with a lower target price of S$1.30, pegged to peers’ average 2019F PE of 11.0x. This is at a 35% discount to its NAV of S$2.00/share as of 2018.

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/ 2019-03-01

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.30 DOWN 1.500