Results

• Within Expectations: Reported 1H17 core earnings of RM248.1m, making up 42.4% and 44.0% of ours and consensus full year forecasts, respectively.

Deviations

• The results are deemed in line considering stronger 2H17.

Dividends

• Declared interim dividend of 7 sen per share (2Q16: 5 sen), representing an annualized yield of 3.2%.

Highlights

• QoQ: Higher revenue (+13.7%) in 2Q17 was contributed by all segments except construction and trading and manufacturing segments. Core earnings improved by 29.9% largely driven by improved sales and vacant possession of Sunway Geo Residences.
• YoY: Core earnings grew by 5.5% on the back of higher revenue (+7.4%) thanks to higher contributions from all segments, except quarry. The higher profit from property development was achieved despite lower revenue due to higher margin from ongoing projects.
• YTD: Revenue grew by 4.8% and core earnings improved by 4.3%. All segments showed improvements except property development segment due to lower sales and progress billings without the contribution from Avant Parc.
• Property… Effective property sales for 1H17 achieved RM339m (2Q17: RM214m) vs full year sales target of RM900m (flat yoy). Sales are expected to pick up with more upcoming launches such as Serene, The Grid and industrial park in Subang. Effective property unbilled sales stood at RM908m, representing 0.8x of FY16’s property revenue.
• Property Investment… Growth was largely attributable to additional revenue from Sunway Velocity Mall (opened in Dec 16), higher visitorship to the theme parks and higher contribution from Sunway Pyramid Hotel which was reopened in 2017 with additional rooms after refurbishment.
• Construction… Stronger results achieved due to stronger progress billings and lower int ra-group elimination. SunCon’s current order book of RM4.6bn translates to a healthy cover of 2.4x on FY16 revenue. In FY17, SunCon aims to secure RM2.0bn worth of contracts including jobs from LRT3.

Risks

• Prolonged downturn in property market.
• Execution risk.

Forecasts

• We raise our dividend forecasts for FY17 - FY19.

Rating

BUY ↔ , TP: RM5.16 ↑

Sunway is our Top Pick within the sector as we believe it should be rerated and trade closer to its peers such as IJM and Gamuda (Figure #5) given its diversified income stream and declassification from property sector. At a P/E of 14.2x as compared to peers, we opine that it represents a deep value stock with mature investment properties and the underappreciated trading and healthcare segment.

Valuation

• Our TP is raised to RM5.16 (from RM5.14) based on a 10% holding discount from SOP derived valuation of RM5.74 after factoring in latest TP for SunCon (HOLD, TP: RM2.33).

Source: Hong Leong Investment Bank Research - 30 Aug 2017