Results 

9MFY14  core  PATAMI  (aft er  adjusting  for  EI  of  RM44.6m) jumped  by  18%  yoy to  RM385.6m  (22.37  sen/share)  which came above  expectations , making up  79%  and 80%  of  ours and consensus’ full year forecasts.

Deviations

• Wider-than-expected  margins from property  development.

Highlights 

Results…  9MFY14  revenue  of  RM3.4bn  showed  a  growth of  5%  yoy  mainly  coming  from  stronger  sales  in  property development,  construction  progress,  quarry  and  healthcare segments.  Apart  from  that,  the  group’s  treasury  operations also contributed  strongly to the improved  performance.

Property…  Lower  3Q  revenue  was  recorded  for  both  yoy and  qoq  comparis on  due  to  lower  revenue  rec orded  as progress billings slowed. Operating profit however increased on the back of lower costs and higher profit recognition  from Sunway  Damansara.  As  at  9MFY14,  effective  sales  and unbilled  sales stand at RM951m  and RM2.1bn  respectively .

Property  Inve stment…  3Q  revenue  was  up  yoy  and  qoq from  higher  rental  income  in  the  newly  completed  Sunway Pinnacle  and Monash  University campus extension, as well as  from  its  leisure  and  hos pitality  division.  Apart  from  the incremental impac t  in  revenue,  operating profit grew  further on the back of higher contribution  from Sunway  REIT.   

Construction…  Higher  progress  billings  in  Malaysia resulted in higher yoy and qoq  3Q  revenue. Operating profit yoy improved as well thanks to higher profit  contribution  from precast in Singapore  but operating profit qoq decline due to provision  made  for  compensation  of  SILK  Highway  and rectification costs   provided  for Rihan  Heights.

SunCon…  No  material  updates  to  date,  apart  from  the recent announcement on the changes in numbers of shares offered  in  the  proposed  listing  of  SunCon  following  the exercise of warrants and ESOS (ratio of 1 SunCon for every 10  Sunway shares remained  unchanged).

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  property  development’s  margin  in  3Q  was exceptionally  higher  and  we  view  that  it  would  normalise  in the coming quarter,  we  remained  positive with the  ability of the  segment  to  record  higher  margins  yoy  on  average. Henc e, we increased our margins   assumptions, res ulting in an upgrade  in FY14-15  EPS by 7.1-7.2%.

Rating

BUY

• Although share price have declined 4% since our upgrade in target  price  in  Sept  ’14,  we  remain  optimistic  about  the group,  especially  with  the  proposed  listing  of  SunCon  as  it would further enhance shareholders’  value. As such, we are upgrading our recommendation to BUY and advise investors to accumulate.

Valuation

• Post earnings revision, our  TP is upgraded to  RM3.65  from RM3.55, based on SOP valuation.

Source: Hong Leong Investment Bank Research - 19 Nov 2014