- We upgrade Sunway to a BUY, with a higher fair value of RM3.60/share (RM3.42/share previously), based on a 15% discount on our SOP value of RM4.25/share.

- This offers an upside potential of 25% comprising a capital gain of 12% and in the form of cash and dividend-in-specie (of Sunway Construction shares which is to be listed by 2Q15) at another ~13%. We have upped our numbers following the release of its latest quarterly result and raised the PE target for its construction division to 13x vs. 12x previously.

- Notwithstanding the lower tax rate and minority interest in the 9MFY14 vs. our estimates and while factoring the better performances of all divisions, we raise our FY14F-FY15F earnings by 11%-12%.

- Sunway posted a 3QFY14 core earnings of RM149mil (+18% QoQ; +20% YoY), bringing the 9M cumulative sum to RM386mil (+19% YoY). This beats expectations, accounting for 85% and 80% our previous and consensus estimates, respectively. No dividend was declared for 3Q.

- Operating-wise, EBIT accounted for 81% of our estimate, but was in line with consensus’ at 72%. This was achieved on the back of strong margins in property development and the stronger-than-expected performance of the construction division.

- The 9MFY14 group EBIT margin improved by 2ppts YoY, aided by higher profit contributions from most segments. Property development’s operating profit rose due to lower common infrastructure cost and higher profit recognition for Sunway Damansara.

- For 9MFY14, property sales reached RM1.2bil (effective: RM951mil), while unbilled sales totaled RM2.8bil (effective: RM2.1bil) as at 30 Sept 2014. It targets to launch RM2.3bil (effective: RM1.7bil) worth of properties in FY14, with sales of RM1.8bil (effective: RM1.3bil).

- Job replenishment totaled RM881mil (all internal), bringing the total outstanding order book to RM3.26bil vs. RM3.48bil as at end-June. The group has targeted ~RM2.0bil worth of jobs, including 70% of external projects, for FY14F. The outstanding external jobs total RM2.19bil, 1.3x FY13’s construction revenue.

- The stock is now trading at an undemanding 11x and 10x PE on FY14F and FY15F fully diluted earnings, respectively (taking into account proceeds from warrants/ESOS and average price of RM3.02/share YTD).

Source: AmeSecurities