• SUNNINGDALE TECH LTD (SGX:BHQ) missed our expectations with a loss of S$1.1m in 2Q19. 1H19 loss was S$0.3m vs. our FY19F net profit forecast of S$22m.
• Gross profit margin recovery guided for in 1Q19 did not materialise as the gross profit margin plunged to a new low of 9.6%.
• We downgrade to REDUCE from Hold as the strength of the earnings recovery is uncertain. The dividend yield of 6.25% could cushion the downside.

2Q19: a Big Miss!

• A disappointing 2Q19 with revenue down 10.3% y-o-y and a reported loss of S$1.1m. We were expecting a full-year net profit of S$22m. Other than the healthcare segment which grew 11.0% y-o-y, the rest of the operating segments all suffered from y-o-y revenue declines (automotive: -15.5%, consumer/IT: -7.6% and mould fabrication:-13.9%).
• Gross profit margin plunged to a low of 9.6%, the first time it has come in below the 10.0% mark.
• On a y-o-y basis, revenue was down by S$19m.
• Other ongoing challenges were the low utilisation rate at its new Penang plant and the ongoing costs associated with the relocation of its Shanghai plant to Chuzhou.

Outlook Remains Challenging

• The ongoing headwinds are likely to continue, including rising labour costs, utility costs, price pressure and negative market sentiment in light of the global trade tensions.
• As the automotive segment accounted for 37% of 2Q19 revenue, the slowdown in the automotive market, especially in China, is hurting Sunningdale Tech.
• Sunningdale Tech is guiding for a stronger 2H19 and expects utilisation at its Penang facility to gradually improve in 2H19. The completion of the shift of its operations from Shanghai to the lower-cost region of Chuzhou should be by end-3Q19, and the bulk of the associated costs incurred for this relocation were already booked in 1H19.
• We note that the healthcare segment’s revenue grew 11.0% y-o-y in 2Q19 and the company is excited about new wins in this segment.

Downgrade to REDUCE

• Given the huge earnings miss, concerns over how fast Sunningdale Tech’s automotive segment can recover have resurfaced. We lower our forecasts, downgrade our call to a REDUCE and cut our Target Price to S$1.14 (based on its 13-year average P/BV of 0.57x) on FY19F book value per share. We previously used 0.69x P/BV (ROE/COE-derived P/BV multiple).
• Upside risks include new order wins/customers.
• De-rating catalysts include a prolonged US-China trade war.
• Sunningdale Tech maintained its interim DPS of 3.0 Scts despite the 1H loss. We think FY19F DPS will remain at 8.0 Scts and 6.25% dividend cushion the share price decline. Net gearing remains a minimal 0.1x.

Source: CGS-CIMB Research - 7 Aug 2019