Results

1HFY14 core PATAMI (after adjusting for EI of RM50.3m) jumped by 18% to RM236.3m (13.71 sen/share), making up 49% and 48% of ours and consensus’ full year forecasts.

Deviations

Largely in line.

Dividends

Declared first interim dividend of 5 sen per share vs. our full year forecast of 11 sen per share.

Highlights

Results… 2Q revenue increased YoY to RM1.2bn driven by growth in construction and property development but partly offset by trading/manufacturing business due to challenging overseas operations. Earnings increase at faster pace of 14% yoy mainly due to better margins achieved by the construction and property development divisions coupled with saving in interest following lower gearing. However, due to the enlarged share base from rights issue exercise, core EPS was down by 15% to 7.3 sen/share.

Property… YoY/QoQ: Property revenue improved due to higher progress billing coupled with margin expansion. Achieved decent effective new property sales of RM385m in 2Q, bring 1H figure to RM628m with the bulk of it coming from Sunway Velocity, Montana and Geo Residences. Total new launches year to date has GDV of RM1.2bn. For FY14, Sunway is targeting to achieve effective new property sales of RM1.3bn (1H achieved 48% of the target) 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 RM1.9bn, translating to 1.63x FY13’s property revenue.

Construction…1HFY14 construction EBIT surged by 32% due to higher contribution from precast business in Singapore and profits from Rihan Heights. YTD, despite secured internal order book of RM531m, Sunway has yet to secure external construction project despite 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 RM3.5bn, translating to 2.2x FY13’s construction revenue.

Risk

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. Hence, we maintain HOLD. Key upside risk to our call will be faster than anticipated take-up for its new property launches.

Valuation

TP maintained at R M3.38ased on SOP valuation (see Figure #2).

Source: Hong Leong Investment Bank Research- 29 Aug 2014