Results

1QFY14 core PATAMI (after adjusting for EI of RM6.3m) jumped by 22% to RM110.3m (6.40 sen/share), making up 23% of ours and consensus’ full year forecasts.

Deviations

Largely in line.

Dividends

None. Dividends usually declared in 2Q and 4Q.

Highlights

Results… 1Q revenue was flat YoY at RM1.03bn, largely due to the decline in construction billings, while all other major divisions posted healthy YoY revenue growth. Despite flattish revenue, earnings were still up by 22% YoY to RM110.3m, mainly due to better margins achieved by the construction and property development divisions. However, due to the enlarged share base from rights issue exercise, core EPS was down by 8% to 6.40 sen/share.

Property… Achieved decent effective new property sales of RM243m in 1Q, with the bulk of it coming from Novena Singapore and Geo Residences while the remainder are equally spread out amongst various launches in Penang, Klang Valley, and Johor. For FY14, Sunway is targeting to achieve effective new property sales of RM1.3bn mainly from sales in Mount Sophia Singapore and the balance revolving around public transportation theme i.e. BRT in South Quay and MRT railway for Velocity, and Iskandar. Although we are cautious of the property market in Singapore and Johor, we draw comfort from Sunway’s sizable effective unbilled property sales of RM1.79bn, translating to 1.54x FY13’s property revenue.

Construction… YTD, Sunway has yet to secure external construction project despite its optimism earlier of the year to replenish its order backlog by another RM2bn. While waiting for these orders to materialise, the division has an outstanding external order book of RM2.86bn, translating to 1.8x FY13’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

Unchanged.

Rating

HOLD

Despite headwinds from property tightening measures and slower contract flows, its recapitalised balance sheet and strong backlog orders will be able to sustain earnings growth for the Group. Moreover, Sunway’s integrated constructionproperty business model should give them an edge in terms of execution. However, in view of less than 10% upside from the current share price (which has appreciated by 16% since we last upgraded to a Buy on 30 August 2013), we downgrade Sunway to a HOLD. A key upside risk to our call will be faster than anticipated take-up for its new property launches.

Valuation

TP maintained at RM3.38 based on SOP valuation (see Figure #2).

Source: Hong Leong Investment Bank Research - 30 May 2014