**Note that the below is merely my own opinions and based on my own memory of the AGM. It may be biased and may not be accurate at all. Readers please be advised if you are planning to invest in the stock, kindly do your own diligence. Thanks.
This is a late post as the AGM for Sunningdale Tech Ltd was held on the 18th April 2016 at Pan Pacific Hotel and I was distracted by events that happened the past week. This was also my first time going for AGM. I have always wanted to visit one in the past, notably for Saizen REIT, but my previous work doesn’t allow me to do so. Thus, I was quite excited and happy that I was able to attend this one. Visiting AGMs will allow shareholders to understand the company better via issues raised and discussed which can’t be found in the annual reports or from websites and also to be able to listen to viewpoints from other shareholders and to learn from the more experienced shareholders.
Sunningdale Tech Ltd (BHQ) is a company listed on the SGX, and it is a manufacturer of precision plastic components. It has 4 main business segments – Consumer/IT, Automotives, Healthcare and Mould fabrication. It’s main clientele is from China, Hong Kong, Singapore and Malaysia. It is considered a micro-cap company, with approximately $200M SGD market capitalization. It is currently trading at a low P/B ratio of approximately 0.644 and has a P/E ratio of about 5.It has a global presence via the multiple manufacturing facilities throughout the world, giving it the strategic position to target and capture opportunities in diverse business sectors globally.
As I look around the people who attended Sunningdale’s AGM, I noticed that most of the people are quite old, whereby most of them looked to be above 50 yo, and very few young people. As per the annual report, the shareholding is quite fractured and mostly owned by retail investors. Also mentioned by the Chairman during the QnA session, the shareholder base is quite stable, as he noticed the same bunch of people at the AGM over the years. However, I can’t help but notice 2 young people decked in suit with their suitcase who are most probably institutional investors.
The AGM began with the CEO [Mr Khoo Boo Khor] giving a short update on the financial statements of the company, which could be found from the annual report, and followed by the integration of their acquisition of First Engineering Ltd. Looking at how they praised the efforts and glowing reports of the integration, I must say they are very happy with their acquisition.
After the very brief presentation by the CEO comes the QnA session. This is the most anticipated time for me as I get to hear the concerns and viewpoints of other more experienced shareholders. I supposed I was quite fortunate due to the fractured shareholding, many various shareholders raised questions and I got to learn quite a bit from it, compared to the STARBURST Holdings AGM which I attended a few days later, whereby 80% of the shares were held by the Chairman and CEO and few questions raised by the shareholders.
Some of the questions raised were pertaining to future company revenue growth, currency volatility impact on company’s profits, insider buying/selling, impact of 3D printing, dividend payout policy, etc etc. Most of the questions were actually answered by the Chairman [Mr Koh Boon Hwee]. I was quite impressed as despite his age, he was still sharp and quick-witted. After returning home and digging his background, only then did I realized that he was previously the Chairman of DBS and SIA as well. However, it seemed to me that he overshadowed the CEO and the CEO seemed to have a smaller presence in the room compared to the Chairman.
So here are some of my takeaway points from the AGM:
- Diversified business segments – Despite revenue from healthcare segment dropping, the Chairman noted that this is due to timing issues of revenue recognition and healthcare projects tended to be realized over a longer period of time 3-5years compared to that of Consumer/IT which has a shorter period of <1 year. Also, due to the stiff competition in plastic precision parts, their strategy is not to specialize in a single product and they plan to expand their product offering in order to capture a bigger variety of markets instead.
- No fixed dividend payout policy – A shareholder pointed out that even though revenue has increased 41.8% y-o-y, dividend payout has not increased to match revenue growth. In fact, it has only increase by 25% to 5cents per share for FY2015. The Chairman reiterated that there was no designated dividend payout policy communicated.
- Pricing pressure from customers – Due to devaluation of RMB and various factors, they are facing strong pricing pressure from customers. The Chairman has pointed out that this is a risk and they are picky about the customers they work with and customers which they can do business with for a long time. They will not accept businesses with single digit profit margins, and are striving to keep profit margins at double digits.
- Credit concentration risk – They are careful that credit risk with respect to trade receivables are not concentrated within a few clients. From their annual report, it can be seen that it has approximately 31% due from 5 major customer groups which are established MNCs. The Chairman also noted that this is low relative to its industry peers where credit concentration norm is approximately 70%.
- CCY exchange risk – With the central banks of various countries intervening so often, the currency exchange volatility is increased. The Chairman pointed out that most of the transactions are done in USD, and would definitely gain from an appreciation of USD. Also, they have tried to mitigate this risk by way of natural hedging through the foreign currency borrowings they have as much as possible.
- Rising wage cost in China – Despite the devaluation of the RMB, as with all emerging countries, as the economy develops and grows, wage cost will rise along as well. This is a clear issue for Sunningdale as they have quite a number of plants situated in China. To combat the rising wage cost, specifically from Shanghai, they are building a plant in Suzhou, which will hopefully reduce cost. They are monitoring this closely.
- Strong positive cash flow – Enuff said, cash is good, and they have been generating positive cash flow over the past few years. Of course granted that past actions are no predictors of future actions but if they have a track record of doing so, I don’t see why they won’t maintain to generate positive cash flow. As of now, they are in a net cash position of $6.3M, which will be reduced after paying out dividends for FY2015.
- Focus on operational efficiency and full integration of all acquisitions and subsidiaries – Guess this is right up in the CEO’s alley with his years of manufacturing operation experience. There is an emphasis on operational efficiency, which will hopefully bring down cost. There is underutilisation in the Southern China plants, and they are making plans for restructuring exercise. Also, there are synergies between the various subsidiaries due to streamlined processes and unified systems and processes across all the entities. This should be good as people can communicate to each other with the same terminologies and understand things better.
- Potential dilution of shareholding – Motion was passed to grant the board the mandate to be able to issue shares up to 50% of the issued shares of the capital of the company. This is a cause for concern as it may result in the company causing massive share dilution if it requires to raise significant amount of capital for aggressive growth via acquisitions. Hopefully this won’t come to pass.
After the QnA session and the voting on matters put forth on AGM and EOGM, the meeting is concluded with a mini lunch buffet outside the room. As I was seated in the room till the end, I could see that people were leaving halfway throughout the meeting and only when I exited the room then I realised why. The old aunties and uncles were crowding around the table jostling for food. I could see that there was not much food left. Thankfully, some nice uncle came over to me and shared some of the puffs and pastries which he has accumulated on his plate. I had some bee hoon as well.
Overall, it was an eye-opening experience for me and I highly recommend shareholders to attend the AGM of their vested companies. Granted, different companies will have different settings and ways of conducting their AGMs but it would definitely be a good experience to learn more about the company.
Also, just an update on the Q1 results of Sunningdale Tech Ltd for FY2016, net profit actually dropped 49.3% y-on-y. This might seem like a big deal, but on closer inspection, it appears that this drop is due to a $1.1M in 1Q15 compared to a foreign exchange loss of $3.2M in 1Q16. This surprised me a bit as I was not expecting the FX volatility to have such a significant impact on the earnings. Guess I need to learn more about the currency volatility impact on this. Despite this, revenue has actually increased 4.4% y-o-y with gross profit margin somewhat flat. Can only wait and see how things go…