SINGAPORE - Another earnings miss from Sunningdale Tech has prompted activist fund Quarz Capital Management to fire off a second open letter to the board of the mainboard-listed high-precision plastic components maker.
This time, Quarz,which holds a less than 5 per cent stake in Sunningdale, wants the company to increase shareholder value by reporting one-off costs separately from core net profit in its income statement, in order to give investors a better sense of its underlying fundamentals.
The one-off costs refer to production ramp-up costs at Sunningdale's new Penang plant, as well as duplicity in operating costs due to a delay in shifting operations from Shanghai to Chuzhou.
"We estimate these non-recurring costs at more than $3 million in the fourth quarter," Quarz wrote on Tuesday. By Quarz's own estimates, Sunningdale's core net profit from underlying operations without the one-off costs could be $5 million for the fourth quarter and $24 million for all of 2018, "considerably closer to consensus estimates".
Sunningdale shares have tumbled 10.25 per cent since it reported fourth-quarter adjusted earnings of $1.7 million last Thursday, down 83.8 per cent from the same period a year earlier, falling short of street estimates.
The shares last traded at $1.40 on Monday, back at where they were before Quarz fired its first open letter on Dec 12 last year, urging Sunningdale to return more cash to shareholders.
Last Friday, CIMB analyst William Tng downgraded Sunningdale to "reduce" from "add". He wrote: "Sunningdale surprised us with an unexpected core net loss of $2 million in the fourth-quarter (by our adjustments). Gross profit margin collapsed in the fourth quarter leading to lower operating profits... Given the seasonally-weak first quarter, the risk of Sunningdale slipping into a net loss in the first quarter cannot be discounted."
To be sure, Sunningdale chief executive Khoo Boo Hor explained in the results filing last Thursday that two factors affected the group's performance in 2018: "Firstly, at our latest manufacturing facility in Penang, utilisation levels were low as this new plant is still in its initial startup phase. However, we expect production and utilisation at this facility to ramp up in the second half of 2019, having secured new projects with several customers."
Mr Khoo added: "Secondly, in China, there were delays in gradually shifting operations and machinery from our facilities in Shanghai to our new 50,000 square metre mega site in Chuzhou. This was due to delays in approvals from certain customers and resulted in additional costs incurred. We expect completion of this shift in operations to take place by the third quarter of 2019."
Sunningdale also flagged in its outlook statement: "Business conditions remain challenging as we continued to face headwinds in the form of rising labour costs, rising utility costs, price pressure and negative market sentiment surrounding the US-China trade war."
Quarz wrote on Tuesday: "It is critical during this transitory period of uncertainty that Sunningdale's management and board take responsibility and commit to increase shareholder value by clarifying and providing additional operating information. Of particular importance is to quantify the total gross/operating loss in Penang and the cost of inefficiencies in maintaining duplicate operations and shifting between Shanghai to Chuzhou."
Otherwise, the company is creating "unnecessary uncertainty" and destroying value for shareholders, Quarz wrote.
Sunningdale has proposed a final dividend of five cents, up from from a final dividend of 4.5 cents for the year before. That brings total dividends for 2018 to eight cents, up from seven. Quarz welcomed the higher dividend, and urged Sunningdale to further increase its dividend payout to shareholders for 2019.