Sunningdale Tech - CGS-CIMB Research 2020-04-08: Negatives Priced In

SUNNINGDALE TECH LTD (SGX:BHQ)

Sunningdale Tech - Negatives Priced In

We cut earnings to factor in the potential lower revenue due to the Covid-19 outbreak.
Despite our earnings cuts, we think the Sunningdale Tech's share price has priced in some of these negatives.
Upgraded Sunningdale Tech to ADD; Target Price based on unchanged 13-year average P/BV of 0.57x.

On 11 Mar 2020, the World Health Organization declared the Covid-19 outbreak to be a global pandemic. The rapid spread of the virus has caused major disruptions to worldwide supply chains, dampened economic sentiment and led to several countries declaring national emergencies, restricting movements and closing their borders to contain the outbreak. We believe this chain of events will hurt Sunningdale Tech (SGX:BHQ)’s FY20F revenue.

China accounted for 32% of Sunningdale Tech’s FY19 revenue. As of 20 Mar 2020, 75-90% Sunningdale Tech’s workforce in China was working; full workforce is in place since end-Mar.
The Malaysian factories are temporarily closed (except for healthcare related products) in accordance with Malaysia’s Movement Control Order (MCO) which is scheduled to last till 14 Apr 2020. We expect output to be affected as production involves part movement between Singapore and Malaysia which is temporarily halted.
In addition, the Singapore factory may be staffed by a lower workforce as some Malaysian workers may not have crossed over into Singapore before the imposition of the MCO. In Singapore, we expect Sunningdale Tech’s production to be unaffected by the Circuit Breaker measures announced by the government.

We cut FY20F sales by 7.3% to account for the production disruptions/demand uncertainty arising from the Covid-19 outbreak. EPS forecasts for FY20F/21F/22F are reduced by 9.1%/8.1%/6.2%.
Sunningdale Tech does not have a formal dividend policy. See Sunningdale Tech Dividend History. Although our base case DPS assumption is 8 Scts for FY20F, we do not rule out a dividend cut as
1. it is prudent to conserve cash in the current situation and
2. M&A opportunities could arise.

Given our earnings cut, our FY20F BVPS falls to S$1.92 from S$1.93 previously. At an unchanged 0.57x P/BV multiple (13-year average), our TP falls slightly to S$1.09.
Upgrade to ADD as we think Sunningdale Tech's share price decline has priced in some of these negatives.
See Sunningdale Tech Share Price; Sunningdale Tech Target Price; Sunningdale Tech Analyst Reports; Sunningdale Tech Dividend History; Sunningdale Tech Announcements; Sunningdale Tech Latest News.
Key upside risk is faster-than-expected recovery in customer demand while e risk is worse-than-expected earnings (or even losses) in 1H20F.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-08

SGX Stock Analyst Report ADD UPGRADE HOLD 1.09 DOWN 1.100