• At 4% of our FY19F forecast, we deem SUNNINGDALE TECH LTD (SGX:BHQ)'s 1Q19 net profit in line as we were concerned it could report a loss for the quarter.
• Gross profit margin recovered slightly and management guided for the recovery trend to continue.
• We upgrade to HOLD as we expect an earnings recovery in 2H19F, driven by the consumer/IT, medical segments and ongoing cost reduction.

Sunningdale Tech 1Q19 Profitable

• SUNNINGDALE TECH LTD (SGX:BHQ)'s 1Q19 net profit of S$0.8m was a relief as we were worried that Sunningdale Tech may incur a loss in the first quarter. Excluding an FX loss of S$0.9m, Sunningdale Tech disclosed that its adjusted net profit was S$2.1m.
• For 1Q19, the revenue decline of 6% y-o-y was mainly due to a 15% decline in sales in the automotive segment (due to weak demand and projects reaching end-of-life).

2Q19F: Q-o-q Growth, Y-o-y Decline

• The combined net losses at the Chuzhou and Penang locations are estimated to be between S$1m and S$2m.
• Given the ongoing cost reduction efforts and the seasonally weak first quarter, we expect Sunningdale Tech to report a q-o-q earnings recovery in 2Q19; however, y-o-y, net profit should still decline.

2H19 Recovery

• Sunningdale Tech's gross profit margin improved in 1Q19 as management tightened cost controls and enhanced operating efficiencies. We expect gross margin to improve in the subsequent quarters. Management expects utilisation rate at its Penang plant to improve in 2H19 and the shift from higher cost Shanghai to the lower cost pant in Chuzhou is expected to be completed in 3Q19.
• While the demand in the automotive segment remains weak, Sunningdale Tech continues to garner momentum in the consumer/IT and healthcare segments. Cost pressures (wage increase and raw material costs) are also easing.

Upgrade to HOLD

• In our view, the Sunningdale Tech's share price decline of 13.5% since our Reduce call on 1 Mar 2019 (see report: Sunningdale Tech Ltd - CGS-CIMB Research 2019-03-01: Disappointing End To FY18) has factored in the current concerns over weak FY19F earnings outlook; hence, we upgrade our call to a HOLD from Reduce previously.
• Our Target Price remains at S$1.38 (still based on 0.69x ROE/COE-derived P/BV multiple).
• Catalysts are new order wins/customers. However, all bets are off if the US-China trade war spirals out of control. It offers dividend yields of 6% and has minimal net gearing.

Source: CGS-CIMB Research - 7 May 2019