Highlights

Below are the key takeaways from our recent meeting with the management:

Ending strong… Since the merger between Sunway and SunCity, QoQ earnings growth has been sequentially stronger. As of 9MFY13, core PATAMI of RM325.5m has already made up 83% and 79% of ours and consensus estimates. Hence, we are expecting another set of strong results, beating market expectations. 4Q performance is scheduled to be released on 27th Feb-14.

Stable new sales… For FY13, we are expecting Sunway to achieve effective new property sales of RM1.4bn or more than RM500m new sales in the final quarter which is mainly lifted by Novena Singapore. That said, effective annual new sales has been on a downtrend since 2011. However, we are not overly concerned as management has been prioritising quicker monetising of developments instead of experiencing another build up in unsold housing inventories (see Figure #1).

Strategic locations… For FY14, Sunway is targeting to achieve RM1.3bn effective new property sales (see Figure #2). We believe that the numbers has been lowballed to better manage expectations. In a cautious property market, Sunway’s strategic launch location should support sales.

For Klang Valley, it will revolve around leveraging public transportation, i.e. BRT in South Quay and MRT railway for Velocity. Meanwhile, as one of the largest land owners in Iskandar with cheaper entry land cost of ~RM26/sq ft (for Medini) and close proximity to the Singapore second link, sales should hold up well. As for Singapore, Mount Sophia’s premium location will attract buyers.

Bullish construction outlook… Despite our cautious outlook on the construction sector, Sunway is targeting RM2bn worth of new external orders, which exceeds our order book replenishment estimate of RM1.5bn.

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

Unchanged.

Rating

BUY

Despite headwinds from property tightening measures and slower contract flows, its recapitalised balance sheet and strong backlog orders comprising of RM3.0bn construction projects (2.4x FY12’s construction revenue) and RM1.8bn unbilled property sales (1.9x FY12’s property revenue) will be able to sustain earnings growth for the Group. Moreover, Sunway’s integrated construction-property business model should give them an edge in terms of execution.

In terms of valuation, Sunway is trading at a FY14 P/E of ~10x, which is lower than its comparable peers of 12x-17x P/E, indicating better risk-rewards ratio Hence, we maintain our BUY call on Sunway.

Valuation

TP maintained at RM3.35 based on SOP valuation (see Figure #3).

Source: Hong Leong Investment Bank Research- 14 Feb 2014