Results

1HFY13 core earnings (adjusted for RM0.2m derivative gain and RM59.7m SunREIT revaluation gain) surged by 42% to RM201.0m (15.55 sen/share), making up 51% and 52% of ours and consensus estimates respectively.

Deviations

Largely in line.

Dividends

Net dividend of 5 sen/share declared as opposed to none declared in the previous corresponding period. Going forward, investors will see semi-annual dividend payout. Payment date to be determined later.

Highlights

Quarter review… 2Q revenue climbed by 12% and 10% YoY and QoQ respectively to RM1.1bn, due to strong property development billings and rebound in business of the trading and manufacturing division after affected by challenging economic conditions. The construction division posted lower revenue of RM372.8m as it was hampered by delays in the LRT/MRT project. Overall, core earnings expanded by a faster pace of 43% and 23% YoY and QoQ respectively to RM110.7m (8.57 sen/share).

1HFY13 review… 1HFY13 revenue climbed by 18% to RM2.1bn, lifted by higher activities in all divisions. Property division was the stellar performer whereby its division’s revenue grew by 40% to RM489.6m. EBIT margins expanded for nearly all divisions and coupled with lower effective tax rate, core earnings grew by 42%.

Property… The BRT and MRT project benefitted launches in South Quay, Damansara and Velocity. Achieved effective new property sales of RM288m in 2Q, hence bring YTD sales of RM491m, making up 44.6% of its RM1.1bn new sales target for FY13. Its unbilled property sales stood at RM1.8bn (see Figure #3), translating to 2.0x FY12’s property revenue.

Construction… Secured RM1.3bn worth of orders, making up 87% of our RM1.5bn order book replenishment assumption. External outstanding order book stood at RM3.3bn (see Figure #4), translating to 2.6x 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

Although earnings are expected to be stronger in the 2H, we prefer to remain conservative buy keeping our forecasts unchanged. Raised FY13-14 dividend forecast to 10 sen/share and 11 sen/share respectively from 5.5 sen/share.

Rating

BUY

Despite the potential headwinds from property tightening measures and slower contract flows, its recapitalised balance sheet and order book will be able to provide earnings visibility over the next two years. Share price has also retraced to a more palatable level, hence we upgrade Sunway to a BUY.

Valuation

TP maintained at RM3.18 based on SOP valuation (see Figure #5).

Source: Hong Leong Investment Bank Research - 30 Aug 2013