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

Singapore

QUARZ Capital Management said 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 thus appealing for Sunningdale chairman Koh Boon Hwee to protect minority shareholders and negotiate a fairer deal.

Last November, Sunningdale Tech said Mr Koh is teaming up with Novo Tellus PE Fund 2 to take the company private at S$1.55 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.

Shareholders can choose between S$1.55 in cash per share, or 1,550 shares in Sunrise Technology Investment Holding (Cayman), the offeror's holding company.

But Quarz, which advises entities collectively holding more than 6 per cent of Sunningdale, said the takeover price is at a significant discount of more than 22 per cent to Sunningdale's book value of close to S$2 per share.

The fund pointed out that the 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 in 2017 given it has been consistently profitable with its net asset value increasing from S$1.78 at end-2016 to nearly S$2 at end-September.

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 the period was S$130 million, the firm only paid out about S$65 million in dividends.

Including retained profits, cash flow, and proceeds of about S$29 million from the sale of a factory in Zhongshan, some 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.

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

But Sunningdale reported S$8.2 million in profit for H1 2020 despite disruptions arising from the pandemic.

And in Q3 2020, excluding one-off items such as government grants, core net profit was up 57 per cent year on year to S$8.7 million.

Quarz is therefore forecasting that Sunningdale can achieve net profit of more than S$36.5 million for 2021.

Against this backdrop, Quarz said the move to take Sunningdale private now would deny shareholders from benefitting from the firm's potential upside.

Its statement also queried the rationale behind Novo Tellus not purchasing a 24 per cent stake in Sunningdale directly from the open market, which would have given shareholders a say in choosing whether to let their shares go.

In addition, Quarz said Sunningdale investors should be aware that there is a cap on the number of Sunrise shares that will be issued.

While Sunningdale's free float is over 65 per cent of total shares, the maximum number of shares in Sunrise allocated to shareholders who opt for them 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 opt to convert their Sunningdale shares into Sunrise shares, only 20 per cent of their Sunningdale shares will be converted due to a pro-rata mechanism. The balance of the consideration for Sunningdale shares will then be satisfied in cash.

In the wake of Quarz's statement, a spokesman for the offeror said: "We continue to listen to market feedback and ask for shareholders to wait for the full details contained in the scheme booklet as well as the recommendations from the company's non-conflicted directors and independent financial adviser before making their decision."