This is an excerpt from NRA Capital’s research report on Sunningdale Tech Limited (SGX: BHQ).

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Trading at attractive multiples compared to peers

We recently conducted a scan some of the publicly listed manufacturing services providers in Singapore, including precision plastic moulding companies.

These companies included Venture, Hi-P, Valuetronics, Sunningdale, Fu Yu, Memtech and Fischer Tech.

Among these companies, Sunningdale and Memtech stand out for their low P/E multiples, compared to an average P/E of 13.46x trailing 12-month earnings. In this article, we pick the larger of the two, Sunningdale, for discussion.

peer comparison

Background – global manufacturer with annual revenue of S$706m

Sunningdale is a manufacturer of precision plastic components with capabilities ranging from product & mould designs, mould fabrication, injection moulding and complementary finishing to the precision assembly of complete products with 19 manufacturing facilities across nine countries – Singapore, Malaysia, China, Latvia, Mexico, Indonesia, Thailand, India and Brazil.

Customers come from the automotive, consumer/IT and healthcare sectors.

Strong earnings momentum

In 1H 2017, the company reported net profit growth of 115.2% to from S$7.4m a year ago to S$15.9m.

After adjusting for non-operating expenses such as retrenchment costs incurred in 2016, net profit growth was still an impressive 49.3% year-on-year.

In fact, adjusted net profit grew by 57.1% year-on-year in 2Q17, compared to 41.3% in 1Q17.

Earnings growth was driven more by gross margin improvement in 2017, which coincided with the completion of the new manufacturing facility in Chuzhou, China during 4Q 2016, as revenue grew by only 6.6% year-on-year in 1H17.

Adjusted earnings grew by S$6.8m year-on-year in 1H17, tracking gross profit growth of S$8.7m.

adjusted net profit

gross margin

Expect high core earnings growth in 3Q17 – 2H seasonally stronger

Assuming revenue growth of 6.6% and gross margin of 15% in 3Q17, we can expect gross profit to grow by S$3.1m year-on-year in 3Q17.

In turn, this translates into around 30% growth in core profit after accounting for some increase in operating expenses.

Based on the adjusted net profit (as reported by the company) of S$7.9m in 3Q16, we can expect adjusted net profit of S$10.3m for 3Q17.

Assuming similar earnings in 4Q17, we can expect a full-year adjusted net profit of S$41m, compared to S$31m in 2016 (+32%).

Adding new capacity and new customers

The longer-term outlook, e.g. 4Q17 and 2018, is supported by the company’s proactive strategy to optimise resources across its manufacturing locations.

For instance, the new plant in Chuzhou has space for the company to expand to take advantage of lower costs in different parts of China – an operating unit was relocated from Shanghai to Chuzhou in 2016.

Moreover, the company is constructing a new facility in Penang, Malaysia which is on track for completion by the end of 1Q18.

This new facility will add capacity within and improve coverage of the Southeast Asia region.

Secondly, the company has indicated in its 2Q17 results announcement that it has been receiving enquiries from both new and existing customers, pointing to the addition of new customers lately.

The addition of both new capacity and new customers suggest that the company has a plan to ensure longer-term growth. What can go wrong?

The company’s reported net profit (before adjustment) for 2H16 included S$14m of net gains from non-operating items such as foreign exchange gains and gains on disposal of plant, property and equipment.

Hence, the company reported a net profit after tax and non-controlling interest of S$31.8m and adjusted net profit of S$17.7m for 2H16.

Therefore, the reported headline growth in 2H17 may not be as high as that of 1H17, even though underlying operating net profit growth is in the high double digits.

reported net profit and reported adjusted net profi

What else can go wrong?

The automotive and consumer/IT sectors account for the bulk of the company’s revenue.

There is the risk that these sectors may slow down in the coming quarters, following a year odd of strong growth.

The good news is that this risk has already been largely factored into the company’s share price.

Based on the peer average P/E of 13.46x, the level of earnings implied by the company’s market capitalisation of S$370.47m is actually S$27.5m.

The last time the company reported as low earnings were in 2014. In 2014, the company reported net profit of S$27.6m on revenue of S$475.6m.

At 13.46x P/E, the company may be worth S$2.73

Based on the trailing 12-month adjusted net profit of S$38.22m, we estimate that the company may be worth S$514m, translating to 1.47x P/B and S$2.73 per share.

We noted that the company’s share price has gained close to 100% for the past one year.

At the minimum, we foresee that its share price should attempt to re-challenge the 52-week high of S$2.18 if our conjectures prove to be true, translating to upside of 10% to 39% from last Friday’s close of S$1.97.

Conversely, the low P/E multiple of this stock implies limited downside if earnings were to disappoint.

valuation workings

The above article is contributed by Mr Tay Eng How. Mr Tay is a former journalist with the Singapore Press Holdings. While we have edited and provided inputs to the article, the above views belong to the contributing writer and should not be construed as an investment recommendation.

NRA Capital is the first independent equity research company licensed by the Monetary Authority of Singapore, offering independent institutional-quality equity research written for sophisticated investors.