• SUNNINGDALE TECH LTD (SGX:BHQ) surprised us with an unexpected core net loss of S$2.0m in 4Q18.
• Gross profit margin collapsed to 10.4% in 4Q18 versus the 9M18 average of 12.5%. Pricing pressure from customers and higher costs eroded margins.
• Sunningdale also incurred S$3.9m in retrenchment costs in 4Q18.
• Positives in the 4Q18 results were progress in the healthcare business segment (revenue + 6.5% y-o-y) and a final DPS of 5 Scts.
• FY19 is expected to be challenging. We downgrade our call to REDUCE.

4Q18 Disappoints

• We were surprised by Sunningdale's unexpected core net loss in 4Q18 (by our adjustments). Gross profit margin collapsed in the fourth quarter leading to lower operating profits.
• Sunningdale also incurred S$3.9m in retrenchment expenses in the fourth quarter and booked a net gain of S$13.1m on disposal of a property in the fourth quarter. Even if we adhere to Sunningdale’s adjustment (see Figure2 in attached PDF report), 4Q18 adjusted net profit of S$1.7m (- 84% y-o-y) was still a disappointment.
• Foreign exchange gains/losses were not significant in the quarter.
• A final DPS of 5 Scts was declared, bringing full-year DPS to 8 Scts.

Outlook to Remain Challenging

• For FY19, Sunningdale continues to see headwinds in the form of rising labour costs, rising utility costs, pricing pressure and negative market sentiment surrounding the US/China trade war. Utilisation rate remains low at its new Penang plant and the situation may only improve in 2H19. The Chuzhou plant was hit by delays (in approvals to transfer production there) from certain customers. Completion of this shift is now expected to take place by 3Q19.
• Given the seasonally-weak first quarter, the risk of Sunningdale slipping into a net loss in 1Q19 cannot be discounted. If that happens, we expect further restructuring charges.

Downgrade to REDUCE From Add

• Given the business challenges and expectations for the factory operations to recover in 2H19, we have reduced our profit estimates accordingly. We cut our call to a REDUCE from Add previously.
• Our ROE/COE-derived P/BV falls to 0.69x (previously 0.92x). Our target price based on FY19 BVPS falls to S$1.38.
• Dividend yield of 5.1% provides some support (Sunningdale has been raising its DPS in the past 4 years). We have chosen to be conservative and assumed that FY19-21F DPS will stay at 8 Scts. The Board may be willing to consider a 9 Scts DPS for FY19 as capex slows down.
• A slowdown in customer orders is a de-rating catalyst.
• Upside earnings risks could come from gaining new customers/orders due to the US-China trade war. Investors can consider switching to
  • FU YU CORPORATION LTD (SGX:F13) (Rating: HOLD, Target Price S$0.20), and
  • MEMTECH INTERNATIONAL LTD (SGX:BOL) (Rating: HOLD, Target Price S$1.08) post its 1Q19 results,
  until clarity on the strength of its consumer electronics business emerges.

Source: CGS-CIMB Research - 01 Mar 2019