Sunningdale Tech - UOB Kay Hian 2020-05-08: 1Q20 Results Below Expectations; Cautious Outlook Due To COVID-19

SUNNINGDALE TECH LTD (SGX:BHQ)

Sunningdale Tech - 1Q20 Results Below Expectations; Cautious Outlook Due To COVID-19

Sunningdale Tech's 1Q20 core net profit of S$0.3m was a big miss. Amid the COVID-19 outbreak and tighter control measures, utilisation rate in its factories declined, resulting in lower revenue and gross profit.
Outlook for the group is challenging as the COVID-19 outbreak could continue to impact utilisation and weigh on demand.

Maintain HOLD with a lower target price of S$1.02, based on 0.54x 2020F P/B, or 0.5SD below its historical mean.
Entry price: S$0.90.

Sunningdale Tech (SGX:BHQ)’s 1Q20 core net profit of S$0.3m (-86.3% y-o-y) was a huge miss. Except for the healthcare revenue which managed to grow 8.6% y-o-y, sales of other key segments fell in 1Q20 which resulted in an 8.8% y-o-y decline in total revenue.
The automotive segment continued in its downtrend since 4Q18, declining 8.6% y-o-y despite the low base in 1Q19. The consumer/IT and mould fabrication segments also recorded y-o-y revenue declines of 11.7% and 11.9% respectively.
Gross profit declined 14.3% y-o-y to S$14.8m.

The weak performance was on the back of lower utilisation in its China and Malaysia plants due to an already seasonally weaker quarter (because of Lunar New Year) and COVID-19 outbreak control measures implemented by governments, which led to temporary closures of its factories/operations. Additionally, management shared that its operations in Mexico and India were also impacted by the nationwide lockdowns.

While operations are gradually allowed to resume, the escalating COVID-19 outbreak has caused supply chain disruptions and would likely negatively impact demand, given dampened economic sentiments as countries declared national emergencies and closed borders in efforts to control the outbreak.
Amid the uncertainty, management shared that COVID-19 has made order visibility even poorer and customer orders forecasts have become shorter.

Sunningdale Tech expects the automotive segment which has already faced a global slowdown prior to the outbreak to be even more challenging.
For the consumer/IT segment, the group continues to see softening demand due to subdued global economic growth on the back of uncertainty surrounding COVID-19.
On a more positive note, the healthcare segment has seen stable demand and the group expects this trend to continue.

We slash our Sunningdale Tech net profit estimates for by 91%, 45% and 37% for 2020-22F respectively as we lower our revenue and gross margin assumptions due to weaker customer demand.
We are expecting the operations to trough in 2Q20 and a gradual recovery starting 2H20. We estimate revenue will decline 18% y-o-y for 2020 and recover by 11% y-o-y in 2021.
Maintain HOLD with a lower target price of S$1.02 (previously S$1.06). We switch our valuation methodology to P/B from PE due to the cyclical nature of the stock. Our target price is based 0.54x 2020F P/B, which is 0.5SD below its historical mean P/B.
Entry price is S$0.90.
See Sunningdale Tech Share Price; Sunningdale Tech Target Price; Sunningdale Tech Analyst Reports; Sunningdale Tech Dividend History; Sunningdale Tech Announcements; Sunningdale Tech Latest News.
Share price catalyst:
- Potential privatisation.
- Potential EPS-accretive or strategic acquisitions.
- Faster-than-expected ramp-up at the two new plants.
Risks include unfavourable forex rates, further pricing pressure from customers and lower-than-expected utilisation.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-08

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.02 DOWN 1.060