SINGAPORE (Dec 13): Activist investment group Quarz Capital Management is urging the board and management of Sunningdale, the global player in precision plastic engineering, to take decisive actions to address the severe undervaluation and promote shareholder value next year.
Quarz wants Sunningdale to increase its dividend distribution to 60% of core net profit to all shareholders -- translating into a dividend yield of 7% -- while it continues to invest $25 million in capital expenditure and retain $17 million of cash flow per year.
“We also propose Sunningdale to distribute more than 50% of the proceeds from the disposal of its Zhongshan factory in consideration of its fortified balance sheet,” says Quarz, could translate into a dividend yield of more than 4%.
In addition, Quarz advocates Sunningdale apply its engineering expertise and seize structural growth opportunities in “megatrends” such as Electro-mobility, Autonomous Driving and Connectivity which could further drive profitability.
These proposals and others were put forth in an open letter dated Thursday and signed off by Jan F Moermann, Quarz’s CIO, and Havard Chi, head of research of Quarz Capital Asia (Singapore).
Explaining its move, Quarz believes Sunningdale's retained cashflow is more than sufficient to expedite on organic and inorganic growth strategies to undertake larger volume, more complex and higher margins projects.
See: Quarz Capital urges CSE Global to distribute $18 million out of net cash to shareholders
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In 1H18 ended June, Sunningdale declared an interim dividend of 3 cents after reporting an 18.8% y-o-y rise in earnings to $9.7 million.
In FY16 and FY17, the company had declared total dividends of 6 cents and 7 cents respectively.
As at 10.23am, shares in Sunningdale was up 4.5% or 6 cents to $1.46. Year to date, the stock is down 26.2%.
Quarz says despite its attractive growth drivers and strong balance sheet with negligible net debt, Sunningdale continues to trade at a severe undervaluation with 2019E Price/Earnings, Price/Tangible Book, EV/EBITDA of 8.6x, 0.7x, and 3.6x respectively.
As a comparison, privatisations and takeovers of SGX-listed precision engineering players have been completed at Price/Tangible Book in excess of 1.0x and significantly higher earnings multiples, adds Quarz.
Quarz believes the problem stems from a lack of familiarity by the investment community with Sunningdale’s engineering expertise, products, resilient business model, recurring cashflow, and strong corporate governance.
“The lack of communication from the company has resulted in investors’ short-term oriented focus on FX profits and quarterly earnings,” says Quarz which says it intends to take advantage of this temporary vivid price/value disparity and increase its shareholding on further price weakness.
As an immediate step, Quarz is calling on Sunningdale to enhance investors’ confidence by increasing its disclosure on its strategic plans, products and business segments.
Quarz also believes that its recommendations can provide a clear pathway for Sunningdale to generate a potential attractive total return of more than 40% for all shareholders in the mid to long-term.
“As long-term shareholders, Quarz looks forward to working with Sunningdale’s board and management to move forward expeditiously on delivering value to all shareholders.”
Sunningdale manufactures products such as the centre console, climate & audio bezels, cluster, and modules for a number of mass market and luxury automotive brands.
The firm also produces precise plastic exteriors, gears and components of printers, point of sales machines, routers and other industrial and consumer lifestyle products.
Its clientele base of MNCs includes companies such as Continental, Magna, Gemalto, Dyson, Roche, Phillips and HP.
See: Exposure to automotive sector and acquisitions by insiders keep Sunningdale Tech at 'buy'
See also: Why Koh Boon Hwee fired himself at Sunningdale Tech
Sunningdale’s net income in 2018 was disrupted by startup cost of new plants, end-of-life cycle of multiple consumer products and trade tensions impacting and pushing orders to 2019. The firm also has a comparatively high base in 2017 where it achieved peak core net income of over $42 million.
With the ramp-up in production of new consumer products, lower oil price, adjustment of supply chains and the increased utilization of the firm’s new Chuzhou and Penang plants, Quarz is forecasting Sunningdale to achieve a conservatively estimated core net profit of $31 million for 2019E (P.E of 8.6x). Free cashflow is also expected to improve to more than $35 million as the company concludes its heavy capex phase by 2018.
In February, Quarz had pressed technology and engineering group CSE Global to distribute $18 million of its $48 million net cash. Quarz also urged the group to commit up to 80% of net income as dividend with a dividend payout floor of $12.5 million.
