Sunningdale Tech - UOB Kay Hian 2020-03-02: 4Q19 Results Ahead Of Expectations, But Outlook Appears Challenging

SUNNINGDALE TECH LTD (SGX:BHQ)

Sunningdale Tech - 4Q19 Results Ahead Of Expectations, But Outlook Appears Challenging

Sunningdale Tech’s 4Q19 core net profit of S$5.0m came in above expectations, with full year forming 126% of our forecast. Its core earnings were lifted by changes in product mix and tightening cost control. However, outlook for the group is challenging as the COVID-19 outbreak could negatively impact utilisation, cause supply chain disruptions and weigh on demand from the automobile and consumer segments.

Maintain HOLD with a lower target price of S$1.06 after 5.7% EPS cut for 2020 (S$1.13 previously).
Entry price: S$1.00.

Sunningdale Tech (SGX:BHQ)’s 4Q19 core net profit of S$5.0m (+189.6% y-o-y) was a strong beat, with full-year core net profit of S$11.9m (- 43.3% y-o-y), forming 126% of our full-year estimate.

Revenue recorded a decline of 9.1% y-o-y in 4Q19 as all segments saw negative y-o-y growths (automobile: -2.8% y-o-y, consumer: - 15.8% y-o-y, healthcare: -5.4% y-o-y, mould fabrication: -8.8% y-o-y).
Revenue from the automobile segment continued its downtrend that had started in 4Q18 as the weak demand across global automobile markets persisted and certain projects are reaching end-of-life.
The consumer segment was also hit by weaker demand and lower contribution from low-margin projects as the group shifts away from these projects to focus on more complex engineering projects.

Despite the decline in revenue, its core earnings surged 189.6% y-o-y in 4Q19, allowing Sunningdale Tech to continue the profitability turnaround seen in 3Q19 from the loss-making 2Q19. This is attributable to the group’s focus on tightening cost and enhancing operational efficiently that began in 3Q19.
Gross profit margin expanded to 11.1% (+0.7ppt) in 4Q19, driven by a change in product mix, tightening cost controls as well as the completion of the group’s part operations from one plant in Shanghai to Chuzhou.

While 4Q19 results came in strongly, we think 2020 could be challenging for the group. Amid the COVID-19 outbreak, we believe the mandatory closure of its factories in China during the first half of February will negatively impact earnings.
Management shared that while operations have gradually resumed production, the situation could cause supply chain disruptions. In addition, the COVID-19 outbreak may weigh on the continued weakness in demand from the automobile and consumer segments, which have been weak for the past few quarters.
On a more positive note, Sunningdale Tech has secured new projects in the healthcare segment from both new and existing customer base, and continues to the see the segment as a key growth driver for the group.

We lower our earnings estimates by 5.7% and 4.9% for 2020 and 2021 respectively as we factor in the impact of the COVID-19 outbreak on sales and overheads. We also introduce our 2022 net profit forecast of S$18.8m.
Risks include unfavourable foreign exchange rates, further pricing pressure from customers and lower-than-expected utilisation.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-03-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.06 DOWN 1.13