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Takeover price for Sunningdale Tech at S$1.55 is 'too low': Quarz Capital

QUARZ Capital Management said in a statement on Thursday that the proposed takeover price for Sunningdale Tech at S$1.55 per share is "too low" and "significantly undervalues" the precision plastic components manufacturer. The activist investor is therefore appealing for Sunningdale's chairman Koh Boon Hwee to protect minority shareholders and negotiate for a fairer deal.

Last November, Sunningdale Tech had announced that Mr Koh is teaming up with Novo Tellus PE Fund 2 to take the company private at S$1.55 in cash per share via a scheme of arrangement.

Mr Koh's entity, Sunrise Technology Investment Holding II, and a subsidiary of Novo Tellus PE Fund 2 hold a 64 per cent and a 36 per cent stake respectively in the offeror company.

Scheme shareholders can choose between receiving S$1.55 in cash per share, or 1,550 shares in Sunrise Technology Investment Holding (Cayman), the holding company of the offeror, at S$0.001 each.

However, Quarz, which advises entities that collectively own more than 6 per cent of the shares of Sunningdale Tech, argued that the proposed takeover price at S$1.55 per share is at a significant discount of more than 22 per cent to Sunningdale's book value of close to S$2 per share.

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The fund pointed out that a huge discount is apparent when compared with Mr Koh's purchase of about one million shares in Sunningdale for about S$1.59 per share in March 2017 and close to 13 million shares for S$1.72 per share in April 2017. It added that the company should now be worth more than that in 2017 given that is has been consistently profitable, and with net asset value increasing from S$1.78 in December 2016 to nearly S$2 September last year.

Quarz also argued that long-term minority shareholders who have stuck with Sunningdale should be able to reap the benefits of higher profitability from the "heavy and extended investment phase" between 2015 and 2019.

While core net profit during that period of time was S$130 million, the firm only paid out about S$65 million in dividends.

Including profits retained, cash flow, and proceeds of about S$29 million from the sale of the factory in Zhongshan totalling S$165 million (S$0.86 per share) of shareholders' monies were invested to build new factories to increase production capacity and ramp up Sunningdale's technology expertise.

These included the centralisation and shift of its China production from Shanghai to lower cost Chuzhou and the completion of its Penang plant in late 2018.

Throughout the period of time, Quarz said that Sunningdale's shareholders, including minority shareholders, "endured an extended period of low profitability and return".

Despite disruptions arising from the pandemic, Sunningdale achieved an S$8.2 million profitability for the first half of 2020. For Q3 2020, net profit jumped to S$10.4 million. Excluding one-off items such as government grants, the core net profit of S$8.7 million for Q3 2020 was 57 per cent higher than the year ago period.

Against this backdrop, Quarz is forecasting that Sunningdale can achieve a net profit of of more than S$36.5 million for 2021 with a price-to-earnings ratio of 8.1 times.

The statement also questioned the rationale behind Novo Tellus' Loke Wai San's move to not purchase a 24 per cent stake in Sunningdale directly from the open market.

"This would have allowed Sunningdale's shareholders to choose whether to sell the shares to him or remain invested in the company," said Quarz.

In addition, Quarz clarified that while Sunningdale's free float is over 65 per cent of Sunningdale's total shares, the maximum number of shares in Sunrise allocated to shareholders who elect to join Sunrise is potentially less than 14 per cent of Sunningdale's total shareholding.

Assuming that the holders of all 65 per cent of the free float would elect to convert their Sunningdale shares into Sunrise's shares, only 20 per cent of their Sunningdale shares will be converted due to the pro-rata mechanism.

This means that these shareholders who thought that they were able to fully convert their Sunningdale shares into Sunrise's shares and benefit from the upside will be forced to sell 80 per cent of their shareholding at S$1.55 per share to the takeover parties.

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