Results

• Slightly Below Expectations: 1QFY16 core earnings fell 20% YoY to RM105m, making up 17% of ours and consensus’ full year forecasts.

• Deviation

• 1Q is a seasonal weaker quarter comprising of 19-22% of historical full year earnings. The slight deviation is mainly due to slower than expected revenue recognition from property development revenue and slightly lower contribution from construction.

Highlights

• Results below… 1QFY16 core profit fell 20% YoY to RM105m mainly due to weaker contribution from all segments.

• Property… Revenue dropped by 44% QoQ due to lower progress billings from ongoing local projects and higher base in 4Q15 which was boosted by higher recognition from few projects such as Sunway Velocity, South Quay and Sunway Montana.

• Effective property sales for 1QFY16 achieved RM198m (versus RM348m in 4QFY15), accounting for 18% of full year sales target of RM1.1bn (+21% YoY). We expect stronger sales ahead on the back of RM1.6bn worth of new project launching.

• Major launches in FY16 include Sunway Gandaria (RM200m), Sunway Geo Residences 3 (GDV:RM400m), Casa Kiara 3 (GDV:RM200m), Velocity (GDV:RM200m), Sunway Iskandar (GDV:RM400m) and others.

• Strong contract newsflow from construction… Its orderbook currently stands at a record high of RM5bn, translating to a healthy cover ratio of 2.6x FY15 revenue. Given its strong track record, SunCon has a strong chance to secure some packages of jobs such as the LRT3 (RM9bn), Pan Borneo (RM16bn), DASH (RM4bn and SUKE (RM4bn). Management is targeting to secure RM2.5bn worth of new contracts in FY16.

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

• FY16 and FY17 earnings are reduced by 10% and 6.5% after incorporated slower progress recognition from property development and lower contribution from construction. Following our downgrading of SunCon’s TP from RM1.94 to RM1.84 posted earnings result, our SOP for Sunway is reduced slightly by 3 sen per share to RM3.72.

Rating

• BUY

Valuation

• Maintain BUY with TP adjusted slightly from RM3.75 to RM3.72 based on SOP valuation.

Source: Hong Leong Investment Bank Research - 30 May 2016