Quarz Capital Management, Ltd. Sends Open Letter to Sunningdale Tech Ltd to Engage on the Proposals to Unlock a Total Potential Return of >40% in Sunningdale's Share Price
GEORGE TOWN,Cayman Islands,Dec. 13,2018 -- Quarz Capital Management,Ltd. (QCM),an investment manager,today issued a letter urging Sunningdale Tech to take decisive steps to address the severe undervaluation of more than 40% which its share price is trading at to its fair value.
QCM believes that the investment community lacks familiarity and understanding of SUNN's engineering expertise,products,recurring cashflow,growth catalysts and strong corporate governance. This has resulted in investors' short-term oriented focus on FX profits and quarterly earnings to determine the value of the firm. Quarz calls on board and management to enhance investors' confidence by increasing disclosure on Sunningdale's products,business segments and strategic plans.
As Sunningdale's cashflow strengthens in 2019 post the conclusion of a heavy capex phase,QCM recommends the firm to increase its dividend distribution to ~60% of Core Net Profit. This can potentially provide an attractive dividend yield of ~7%,while allowing the company to invest ~S$25million of CapEx and still retain ~S$17million of cashflow. Quarz proposes Sunningdale to distribute more than 50% of the proceeds from the disposal of its Zhongshan factory.
The retained cashflow and fortified balance sheet is more than sufficient to support the firm's growth strategies to undertake larger volume,more complex and higher margin projects. QCM advocates the firm to apply its engineering expertise and seize growth opportunities in 'Megatrends' such as Electro-mobility,Autonomous Driving,and Connectivity.
As a Singapore home grown company which has establish itself as a global player in precision plastic engineering,Quarz tremendous respect for what the board and management team has accomplished. QCM believes that its recommendations will deliver substantial additional shareholder value and has delivered the following letter to Sunningdale Tech Ltd's management team,board of directors and other stakeholders.
QUARZ CAPITAL MANAGEMENT,LTD. ISSUES OPEN LETTER TO
THE MANAGEMENT AND BOARD OF SUNNINGDALE TECH (SGX: BHQ)
ALL RECIPIENTS ARE ADVISED TO READ
"IMPORTANT DISCLOSURE INFORMATION"
AT THE END OF THE ATTACHED LETTER
Quarz Capital Management,Ltd.
Clifton House 75 Fort Street
George Town I KY1-1108 I Grand Cayman
Cayman Islands
13 December 2018
TO ENGAGE ON THE PROPOSALS TO INCREASE DIVIDEND DISTRIBUTION,EXPEDITE ON EXPANSION STRATEGIES AND PROMOTE SHAREHOLDER ENGAGEMENT
- POTENTIAL TOTAL RETURN IN EXCESS OF 40% OVER THE MID-TERM -
Dear Mr. Khoo,Ms. Soh and Members of the Board,
Quarz Capital with its affiliates have collectively built up a stake of just under 5% in Sunningdale Tech Ltd (the "Company","Firm"," "SUNN SP","Sunningdale" or "SUNN"),making us one of the top 5 shareholders of the firm. Our sizeable stake demonstrates our significant level of conviction in the value opportunity present at Sunningdale today.
We congratulate board and management's first-rate execution in establishing Sunningdale as a global player in precision plastic engineering. SUNN has significantly out-spent its Singapore peers by investing more than S$135million (>50% of Market Cap) since 2014 to increase its technology lead,automation and global production setup. The firm has recently been qualified to produce key components for the aerospace industry,a strong testament to its strong engineering capabilities.
Sunningdale designs and manufactures some of the most complicated high-volume plastic components in their key automotive and consumer products segment (~35%/~60% share of Operating Profit). The firm's products are ubiquitous in our daily life such as the center 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.
The firm has established long-term 'sticky' relationships with a diversified base of MNCs such as Continental,Magna,Gemalto,Dyson,Roche,Phillips and HP which can increase revenue stability. High cost of production disruptions pushes these MNCs to prioritize suppliers such as SUNN who have met their stringent approval process and built strong track record in consistently delivering high-quality products. As MNCS roll out global manufacturing platforms with 'Just in time' production and product launches,SUNN's global footprint puts itself in prime position to support these major projects.
The firm's substantial production footprint in South East Asia also increases its flexibility of shifting production from China if necessary. We are optimistic that SUNN will be a key beneficiary of MNCs increasingly seeking ex-China suppliers to reduce their supply chain's exposure to China-US trade tensions.
SUNN's Net Income in 2018 was disrupted by start-up 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 S$42million.
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,we forecast that SUNN can achieve a conservatively estimated core net profit of S$31million for 2019E (P.E of 8.6x). Free Cashflow will improve materially to more than S$35million as the company concludes its heavy CapEx phase by 2018. SUNN's growth in the mid-long term are driven by structural trends such as the migration from steel to light-weight plastic to enhance fuel efficiency and safety in automotive. Successful qualification to produce higher value products in medical technology and aerospace industries can further lift its profit margins.
Despite its attractive growth drivers and strong balance sheet (negligible net debt),Sunningdale continues to trade at a severe undervaluation with Price/Earnings,Price/Tangible Book,EV/EBITDA of 8.6x,0.7x,and 3.6x (2019E) respectively. Privatizations 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. We believe that the investment community lacks familiarity with SUNN's engineering expertise,resilient business model,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. Quarz intends to take advantage of this temporary vivid price/value disparity and increase our shareholding on further price weakness.
We urge Sunningdale's board and management to take decisive actions to address the severe undervaluation and promote shareholder value. As Sunningdale's free cashflow and balance sheet strengthen in 2019,we recommend the firm to increase its dividend distribution to ~60% of Core Net Profit. This can potentially provide an attractive dividend yield of ~7% to all shareholders. SUNN can continue to invest ~S$25million in CapEx and retain ~S$17million of cash flow per year. We also propose SUNN to distribute more than 50% of the proceeds from the disposal of its Zhongshan factory in consideration of its fortified balance sheet (potentially >4% Dvd Yld).
We believe that the retained cashflow is more than sufficient to expedite on organic and inorganic growth strategies to undertake larger volume,more complex and higher margins projects. The transformational acquisition of First Engineering in 2014 extended SUNN's client base and technology particularly in the automotive sector. We advocate the firm to apply its engineering expertise and seize structural growth opportunities in 'Megatrends' such as Electro-mobility,Autonomous Driving and Connectivity which can further drive profitability.
As an immediate step,we call on Sunningdale to enhance investors' confidence by increasing its disclosure on its strategic plans,products and business segments. Strong corporate governance and leadership coupled with increased understanding of the company can readily rectify the current depressed valuation of the firm.
Quarz 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.
Sincerely yours,
Mr. Jan F. Moermann
Chief Investment Officer,Quarz Capital Management,Ltd.
Mr. Havard Chi,CFA
Head of Research,Quarz Capital Asia (Singapore)
For further information,please contact:
Havard Chi,CFA (hch@quarzcapital.com,+65 9433 3898)
operations@quarzcapital.com
About Quarz Capital Management
Quarz Capital Management,Ltd. is a value oriented and research driven investment advisory firm that seeks to earn above average,long-term returns by identifying value investments across the globe.
www.quarzcapital.com
Important Disclosure Information
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF SUNNINGDALE TECH LIMITED'S SECURITIES AND ACTION THAT SUNNINGDALE TECH LIMITED'S BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE,NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. SUNNINGDALE TECH LIMITED ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT,NOR HAVE WE RECEIVED,PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE,NOR DO WE INTEND TO RECOMMEND OR ADVISE,ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF SUNNINGDALE TECH LIMITED'S SECURITIES,THIS LETTER DOES NOT PURPORT TO BE,NOR SHOULD IT BE READ,AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE AT WHICH SUNNINGDALE TECH LIMITED'S SECURITIES MAY TRADE AT ANY TIME. AS NOTED,THIS LETTER EXPRESSES OUR CURRENT VIEWS ON SUNNINGDALE TECH LIMITED. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF SUNNINGDALE TECH LIMITED SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING SUNNINGDALE TECH LIMITED WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING SUNNINGDALE TECH LIMITED AND ITS PROSPECTS WITHOUT RELYING ON,OR EVEN CONSIDERING,ANY OF THE INFORMATION CONTAINED IN THIS LETTER.
As of the publication date of this report,Quarz Capital Management Ltd. and its affiliates (collectively "Quarz"),others that contributed research to this report and others that we have shared our research with (collectively,the "Authors") have long positions in and own options on the stock of the company covered herein (SUNNINGDALE TECH LIMITED) and stand to realize gains in the event that the price of the stock increases. Following publication of the report,the Authors may transact in the securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information herein from sources they believe to be accurate and reliable. However,such information is presented "as is",without warranty of any kind – whether express or implied. The Authors make no representation,express or implied,as to the accuracy,timeliness,or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice,and the Authors do not undertake to update or supplement this report or any information contained herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices,data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors' views as of this date,all of which are accordingly subject to change. The Authors' opinions and estimates constitute a best efforts judgment and should be regarded as indicative,preliminary and for illustrative purposes only.
Any investment involves substantial risks,including,but not limited to,pricing volatility,inadequate liquidity,and the potential complete loss of principal. This report's estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security,and is not expressed as,or implied as,assessments of the quality of a security,a summary of past performance,or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment,security,or commodity discussed herein or of any of the affiliates of the Authors. Also,this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors' abilities and beliefs,all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates,officers,and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document,investors should assume that the Authors are long shares of SUNNINGDALE TECH and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the company's common equity is higher than prior to the original publication date. These affiliates,and individuals shall have no obligation to inform any investor about their historical,current,and future trading activities. In addition,the Authors may benefit from any change in the valuation of any other companies,securities,or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors' operations and their affiliates. The compensation structure for the Authors' analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors' documents.
The information contained in this document may include,or incorporate by reference,forward- looking statements,which would include any statements that are not statements of historical fact. Any or all of the Authors' forward-looking assumptions,expectations,projections,intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks,uncertainties and other factors,most of which are beyond the Authors' control. Investors should conduct independent due diligence,with assistance from professional financial,legal and tax experts,on all securities,companies,and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this letter are forward-looking statements including,statements that are predications of or indicate future events,trends,plans or objectives. Undue reliance should not be placed on such statements because,by their nature,they are subject to known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance or activities and are subject to many risks and uncertainties. Due to such risks and uncertainties,actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Forward-looking statements can be identified by the use of the future tense or other forward-looking words such as "view," "believe," "convinced," "expect," "anticipate," "intend," "plan," "estimate," "should," "may," "will," "objective," "project," "forecast," "management believes," "continue," "strategy," "promising," "potential," "position" or the negative of those terms or other variations of them or by comparable terminology.
Important factors that could cause actual results to differ materially from the expectations set forth in this letter include,among other things,the factors identified in the risk sections in SUNNINGDALE TECH LIMITED Annual Report for the year ended DECEMBER 31st,2017 and prospectus. Such forward-looking statements should therefore be constructed in light of such factors,and Quarz Capital Management is under no obligation,and expressly disclaims any intention or obligation,to update or revise any forward-looking statements,whether as a result of new information,future events or otherwise,except as required by law.
