Results

1QFY13 core earnings (adjusted for RM0.3m derivative gain) surged by 41% to RM90.3m (6.99 sen/share), making up 25% and 24% of ours and consensus estimates respectively.

Deviations

As 1Q results tend to make up 17-18% of full year earnings, we consider the results to be above expectations. The upside surprise was mainly due to stronger construction and quarry margin.

Dividends

None. Usually declared in 4Q.

Comments

Results review… YoY, revenue climbed by 25% to RM1bn, due to increased activities in its construction, property development and quarry division. On the other hand, trading division saw its revenue contract by 12% to RM130m due to challenging economic conditions in Australia and Indonesia. Core earnings expanded by a faster pace of 41% due to better margins posted in the construction and quarry division which posted EBIT margins of 6.4% and 10.8% (vs 2.8% and 2.5% respectively) respectively. QoQ, due to seasonal weakness, revenue and core earnings fell by 15% and 21% respectively.

Property… For FY13, management has targeted to achieve RM1.1bn in effective new property sales from scheduled launches (see Figure #2). During the quarter, Sunway has already achieved effective new sales of RM203m, making up 18% of FY13’s target. Its unbilled property sales stood at RM1.9bn (see Figure #3), translating to 2.1x FY12’s property revenue.

Construction… Secure RM1bn worth of orders, making up 68% of our annual order book replenishment assumption of RM1.5bn for FY13. External outstanding order book stood at RM3.4bn (see Figure #4), translating to 2.7x FY12’s construction revenue.

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

FY13-14 earnings raised by 5.1% and 5.5% respectively.

Rating

HOLD

• We continue to like Sunway for its integrated property cum construction business model and we are beginning to see the synergistic effect taking place. The company has strategic land banks in Malaysia coupled with healthy unbilled sales and order book to provide earnings visibility over the next 2 years. However, in view that its share price has exceeded our upwards revised TP, we downgrade Sunway to a HOLD call.

Valuation

• TP raised by 8% to RM3.65 based on SOP valuation while our TERP TP works out to RM3.17. We have not included Iskandar potential in our valuation as contribution towards earnings will only be material from FY15 onwards. Our implied P/E for Sunway’s property division already works out to ~20 P/E.

Source: Hong Leong Investment Bank Research - 31 May 2013