Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM


Sunningdale Tech - 2Q19 Hit by Slowdown in 3 Key Segments; Downgrade to SELL

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  • SUNNINGDALE TECH LTD (SGX:BHQ)'s 2Q19 core net loss of S$0.7m was a big miss, with 1H19 meeting only 8% of our full-year estimate due to weak auto demand. 2Q19 revenue and gross profit fell by double digits y-o-y.
  • We cut our 2019-20F EPS by 17-49%, and reduce our target price by 17% to S$1.01, pegged to peers’ average 2020F PE of 11x. Downgrade Sunningdale Tech to SELL.
  • Recovery in 2H19 from the ramp-up of two new plants will help marginally, but we expect 2019 core net profit to decline 55% y-o-y from the high base last year.

2q19 Results

2Q19 core net loss was a negative surprise and missed expectations.

  • SUNNINGDALE TECH LTD (SGX:BHQ)’s 2Q19 earnings missed expectations with core net profit declining to a loss of S$0.7m. Revenue fell 10.3% y-o-y, dragged by a decline in all segments, except the healthcare segment which gained 11% y-o-y.
  • The steepest decline continued to come from the automotive segment which declined 15.5% y-o-y, hampered by the slowdown in global automotive market and certain projects reaching end-of-life.
  • Gross profit fell 32.4% y-o-y, mirroring the 3.1ppt decline in gross margin as a result of lower utilisation.

Two new plants continue to affect operations.

  • Utilisation levels of Sunningdale Tech’s new Penang plant continue to be low as the plant is still in its initial start-up phase. Sunningdale Tech expects production and utilisation at this facility to gradually improve in 2H19 from new projects launches.
  • In addition, the relocation to its new site in Chuzhou is still ongoing, and is expected to be completed in 3Q19.

2019 is set to be challenging with core net profit decline of 55% yoy; cut 2019-21 dividend by 1 S cent/share.

  • Sunningdale Tech continues to be impacted by the slowdown in global automotive market which has hampered growth in their largest revenue contributor for two consecutive quarters. In addition, the group faces margin pressure due to lower utilisation rate in the face of rising trade tensions.
  • Sunningdale Tech expects a better 2H19 compared to 1H19 on the back of several new projects secured in the healthcare segment.

Stock Impact

A potential pick-up in 2H19, but 2019 is set to be challenging vs the high 2018 base.

  • Since the new Penang plant is expected to ramp up in 2H19 and the shift to Chuzhou is expected to be completed in 2H19, we expect Sunningdale Tech’s performance to only start improving at that point. However, we expect 2019 revised core net profit to decline 55% y-o-y from the high base last year

Earnings Revision / Risk

  • We cut our 2019-21 net profit forecasts to S$9.4m (-49%), S$17.5m (-17%) and S$19.0m (-16%) respectively. We factor in lower revenue due to the slowdown in automotive segment and lower gross margins due to lower utilisation rate and pricing pressure from customer.
  • We also cut our full-year dividend forecast for 2019-21 by 1 S cent/share to 7 S cents on the back of weaker core net profit and balance sheet, which is in a marginal net debt position of S$7m as of 2Q19, down from a net cash position of S$10m in 1Q19.
  • Risks include unfavourable forex rates, further pricing pressure from customers and lower-than-expected utilisation.

Valuation / Recommendation

  • Downgrade to SELL with a 17% lower target price of S$1.01, pegged to peers’ average 2020F PE of 11.0x.

Share Price Catalyst

  • Potential privatisation.
  • Potential EPS-accretive or strategic acquisitions.
  • Faster-than-expected ramp-up at the two new plants.

Source: UOB Kay Hian Research - 7 Aug 2019

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Sunningdale Tech 1.30 -0.03 (2.26%) 158 

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