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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Nov 2019, 4:47 PM

 

Sunningdale Tech - Windfall From Property Disposal in China

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  • Sunningdale Tech has entered into a sale and purchase agreement to sell its property in China. The total consideration inclusive of taxes is S$28.9m and net gain is estimated to be S$13.4m, equivalent to 56.3% of 2018 net profit. This is a good opportunity for Sunningdale Tech to dispose of a non-core asset and the net proceeds will provide additional funding to its business.
  • Maintain HOLD and target price of S$1.50, pegged to peers’ average 2019F PE of 10.6x. Entry price is S$1.25.

What’s New

Entered into a sale and purchase agreement to dispose of a property in China.

  • Sunningdale Tech (SUNN) on 11 Dec 18 entered into a sale and purchase agreement with Zhongshan Wanbaolongmen Wood Products to dispose of its property in Zhongshan, China for an aggregate cash consideration (inclusive of taxes) of S$28.9m.

Disposal of non-core asset.

  • Sunningdale Tech had used the property as a factory in the past, but after a restructuring in 2Q16, Sunningdale Tech no longer conducts business operations at the property and currently holds the property to earn rental income. There is no mortgage on the property.
  • Based on an independent valuation report as at 31 Dec 17, the market value of the property was approximately S$23.9m.

Improved cash flow.

  • This is a good opportunity for Sunningdale Tech to dispose of a non-core and excess asset, and the financial gains from the proposed disposal will provide Sunningdale Tech with additional working capital to fund its business operations and improve cash flow of the group.
  • The net book value of the property as at 30 Sep 18 was S$8.4m and the consideration represents an excess of S$19.1m over the net book value of the property. The amount of gain from the proposed disposal is estimated at S$13.4m, after taking into account estimated taxes, relevant agent and professional fees and other associated transaction costs.
  • Sunningdale Tech intends to use the net proceeds from the proposed disposal for general working capital purposes.

Stock Impact

Factory sale could boost cash flow and balance sheet.

  • This disposal is expected to boost cash flow and improve Sunningdale Tech’s balance sheet notably; the net gain is equivalent to 56.3% of 2018F net profit and could boost 2018F NAV per share by 7 S cents, or 3.6%.

Earnings Revision / Risk

  • We maintain 2018-20 net profit forecasts as the net gain from the disposal of the property is deemed a non-core item.
  • Risks include unfavourable foreign exchange rates, further pricing pressure from customers and lower-than-expected utilisation.

Valuation / Recommendation

  • Maintain HOLD and target price of S$1.50, pegged to peers’ average 2019F PE of 10.6x. This is at a 24% discount to its NAV of S$1.97/share as of 3Q18.

Share Price Catalyst

  • Unlocking value from the sale of the factory in China.
  • Potential privatisation.
  • Potential EPS-accretive or strategic acquisitions.
  • Faster-than-expected ramp-up at the two new plants.

Source: UOB Kay Hian Research - 12 Dec 2018

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