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

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



2019 RESULTS


4Q19 results above expectations.

  • 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 declined across all segments.

  • 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.

Cost control measures lifted profitability.

  • 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.


STOCK IMPACT


Outlook appears challenging.

  • 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.


EARNINGS REVISION/RISK

  • 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.


VALUATION/RECOMMENDATION



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/ 2020-03-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.06 DOWN 1.13



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