Results

• 9M17 core earnings of RM398.9m (+3.4%) came in slightly below our expectation at 68.1% but in line with consensus estimation at 71.4% of full year forecasts.

Deviations

• Lower contribution from property development.

Dividends

• None.

Highlights

• QoQ: Higher revenue (+6.3%) in 3Q17 was contributed by all segments except property development and quarry segments. Core earnings improved by 7.6% largely driven by improved performance from higher occupancy and visitorship to the group’s investment properties.
• YoY: Core earnings grew by 1.9% on the back of higher revenue (+16.0%) thanks to higher contributions from all segments, except for property development and quarry.
• YTD: Revenue grew by 8.6% and core earnings improved by 3.4%. All segments showed improvements except property development and quarry segments. Lower contribution from property development was due to lower sales and progress billings from local development in the absence of contribution from Avant Parc.
• Property development… Effective property sales for 9M17 achieved RM533m (2Q17: RM339m) vs full year sales target of RM900m (flat yoy). Sales are expected to pick up with launches such as Serene, The Grid and industrial park in Subang. Effective property unbilled sales stood at RM766m, representing 0.64x 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 intra-group elimination. SunCon’s current order book of RM6.8bn is at all-time high, translating to a healthy cover of 3.8x on FY16 revenue.

Risks

• Prolonged downturn in property market.
• Execution risk.

Forecasts

• We lower the contribution from property segment. Consequently, core earnings forecasts for FY17/18/19 are cut by 3.0%/3.2%/1.4%, respectively.

Rating

BUY ↔, TP: RM2.25 ↔

• 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 forward P/E of 13x as compared to peers, we opine that it is a deep value stock with mature investment properties and the underappreciated trading and healthcare segments.

Valuation

• TP is maintained at RM2.25, based on a 10% holding discount from SOP derived valuation of RM2.50 (Figure #6).

Source: Hong Leong Investment Bank Research - 28 Nov 2017