Sunningdale Tech - UOB Kay Hian 2019-05-08: 1Q19 Marginal Qoq Improvement, Recovery Expected In 2H19

SUNNINGDALE TECH LTD (SGX:BHQ) | SGinvestors.io SUNNINGDALE TECH LTD (SGX:BHQ)

Sunningdale Tech - 1Q19: Marginal Qoq Improvement, Recovery Expected In 2H19

  • SUNNINGDALE TECH LTD (SGX:BHQ)’s 1Q19 core net profit missed our expectation, meeting only 9% of our full-year estimate, and declined 70% y-o-y due to weaker demand in the auto segment.
  • We expect a recovery in 2H19 from the ramp-up of two new plants and more projects in the consumer and healthcare segments. We cut our 2019-21F EPS by 9-18%, and lower our target price by 6% to S$1.22, pegged to peers’ average 2020F PE of 11x (rolled over from 2019).
  • Maintain HOLD. Entry price: S$1.10.



1Q19 RESULTS


Sunningdale Tech's 1Q19 results missed expectations, marginal qoq improvement.

  • SUNNINGDALE TECH LTD (SGX:BHQ)’s 1Q19 earnings missed expectations with core net profit declining 70% y-o-y. Revenue fell 5.6% y-o-y, due to a 15% y-o-y decline in the automotive segment, while the other segments remained stable.
  • However, gross profit fell 19.4% y-o-y as gross margin declined 1.9ppt, mainly due to a drag from fixed overheads from sales decline.
  • On the positive side, core net profit and gross margin recovered marginally q-o-q, from S$1.7m in 4Q18 to S$2.1m in 1Q19 and from 10.4% in 4Q18 to 10.8% in 1Q19 respectively.

Two new plants continue to affect operations, expect improvement in 2H19.

  • First, at Sunningdale’s new Penang plant, utilisation levels were low as the plant is still in its initial start-up phase. However, it expects production and utilisation at this facility to ramp up in 2H19 from new projects secured.
  • Second, the shifting of operations and machinery to Sunningdale’s new site in Chuzhou is still ongoing. Sunningdale expects the completion of this shift in 3Q19.

Expect a better 2H19 from new projects and cost savings from new factory.

  • Sunningdale expects a better 2H19 compared to 1H19 from several new projects secured in the consumer and healthcare segments. These include liquid syringes, infant-related products and liquid silicone products.
  • In addition, successful relocation to the new Chuzhou plant in China is expected to generate additional cost savings.


STOCK IMPACT


Potential to see pick-up only in 2H19.

  • Since the new Penang plant and shift to the Chuzhou mega plant are only expected to ramp up and complete in 2H19, we expect the Sunningdale’s performance to only start improving in 2H19.


EARNINGS REVISION/RISK

  • We cut our 2019-21 net profit forecasts to S$18.5m (-16%), S$21.1m (-17%) and S$21.3m (-16%) 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

  • Maintain HOLD with a lower target price of S$1.22, pegged to peers’ average 2020F PE of 11.0x. We roll over our valuation base year from 2019F to 2020F. Entry price is S$1.10.


SHARE PRICE CATALYST

  • 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/ 2019-05-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.22 DOWN 1.300



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