May 16, 2017

Sunningdale Tech’s 1Q17 core net profit was above expectations due mainly to the improvement in gross profit margin from FY16 efforts to lower operating costs.

1Q17 gross profit margin was 15.0% versus 13.6% in both 1Q16 and 4Q16. Excluding S$2.1m in FX losses and S$0.1m in retrenchment costs, core net profit was higher at S$9.9m versus reported net profit of S$7.7m.

Due to extensive marketing efforts (marketing and distribution expenses grew 15.5% yoy in 1Q17), all 3 business segments registered double-digit yoy revenue growth. Healthcare segment sales grew 15.9% yoy, while the automotive segment (14.7% yoy growth) accounted for 39.2% of 1Q17 sales while the consumer/IT segment (10.7% yoy growth) accounted for 38.4% of 1Q17 revenue.

Management highlighted that outlook is still uncertain and cost pressures remain. The group will continue to drive down costs and improve efficiency. The group will also begin construction of a new manufacturing facility in Penang, Malaysia, with completion scheduled for the end of 1Q18. Sunningdale will progressively add capacity to its newest lower cost manufacturing plant in Chuzhou, China.

We raise FY17-19F core EPS forecasts by 33.5-42.2% as we adjust for gross margin expansion driven by the successful cost reduction initiatives. Downside risks remain unfavourable exchange rates and a pull-back in customers’ orders.

Maintain ADD with a higher TP of S$2.19, based on a 1.11x (ROE: 9.6%, COE: 8.6%, zero growth) FY17 P/BV multiple versus the previous 0.8x P/BV multiple as ROEs improve. –CIMB

Sunningdale Tech closed at: S$1.830