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


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.

Sunnindale Tech's 1Q20 results weaker than expected.

  • 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.

Hit by slowdown across all segments due to lower utilisation from temporary factory closures and lower demand.

  • 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.

Outlook appears challenging.

  • 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.

2Q20 expected to be a challenging quarter.

  • 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.

Maintain HOLD

  • 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 | 2020-05-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.02 DOWN 1.060