Sunway Bhd
(May 30, RM3.11)
Maintain outperform with target price of RM3.62:
Sunway registered core net earnings of RM110.3 million for the first quarter ended March 31 of financial year 2014 (1QFY14) which was within forecasts, fulfilling 20.4% and 22.6% of our and street’s expectations respectively.

Property sales for 1QFY14 of RM348 million were considered broadly in line with management’s and our sales estimates of RM1.8 billion. The key driver for 1QFY14 sales was Geo Residences — which made up 40% of total sales — which were launched towards the end 4QFY13.

Considering that the group launched only two projects, Sunway Wellesley and Sunway Eastwood, in 1QFY14 with a total gross development value (GDV) of RM205 million, the achieved sales is commendable as it made up 19% of targets.

Furthermore, the amount of GDV launched in 1QFY14 only makes up 8.9% of its FY14E planned launches of RM2.3 billion, as more launches are skewed towards the second half of 2014.

Sunway has only replenished its internal order book by another RM178 million, and has yet to secure any external order book replenishments to date versus our assumption of RM1.5 billion.  

Year-on-year, Sunway’s reported core net profit rose 22.1% to RM110.3 million from RM90.3 million, despite a flattish revenue of RM1025.7 million (+0.5%).

Its revenue remained flattish as growth at its property development (9.7%), construction (1.8%) and quarry divisions (+13.3%) was offset by lower revenue contribution from its trading and manufacturing (8.5%), and investment holding (-33.9%) divisions.

The improvement in its core earnings was due to a 2.9 percentage point (ppt) expansion in its core operating margins to 11.3% underpinned by the better margins recorded in its property development division of 23.4% (+10.8 ppt) followed by its construction division’s core operating margin of 7.1% (+0.7 ppt).

Quarter-on-quarter, its core earnings of RM110.3 million decreased by 29.7% due to lower revenue of RM1025.7 million (-24%) as all the major divisions registered seasonally weaker results. This is typical for Sunway as its 1Q tends to be the weakest and we believe this has to do with seasonal festivities, which affect both billings from the property and construction segment.

Moving forward, we still think that management’s sales target of RM1.8 billion on the back RM2.3 billion targeted launches is still highly realistic. The reason for this is 82% of its upcoming launches are being priced below RM1 million per unit, which is more palatable to the market’s demand for “affordable” houses.

We also believe that the stock could be rerated if its upcoming Sunway Iskandar secures strong take-up rates.

We have raised our sum-of-parts-based target price to RM3.62 from RM3.33. We reiterate our “outperform” call on Sunway for its synergistic business, which enriches its core driver as an integrated township developer.

We also like the group for its strong order book replenishments and for being a beneficiary the Klang Valley Mass Rapid Transit 2 project. The stock is our top pick for 1Q of 2014, and it has done well to date with 17.3% year-to- date returns. — Kenanga Research, May 30

This article first appeared in The Edge Financial Daily, on June 2, 2014.

Business & Markets

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