Sunway’s 1Q18 core PATMI of RM122m (-27% QoQ; +14% YoY) was within expectations. The lower QoQ results were mainly due to lower performances from property development and construction while higher YoY results were driven by improved contribution from property investments. In FY18, we expect the growing contributions from other businesses to drive the earnings growth despite the slowdown in property development. Our FY18/19 earnings are revised higher by 1.5%/4.0% after minor model up keeping adjustments. Reiterate BUY with unchanged TP of RM2.30 based on a 10% holding discount from SOP-derived valuation of RM2.55.

Within expectations. 1Q18 revenue of RM1.3bn translated into a core PATMI of RM121.9m, accounting for 20.0% and 20.1% of HLIB and consensus full year forecasts, respectively. We deem the results in line as 1Q numbers are typically weaker and only make up less than 20% of full year numbers.

QoQ. 1Q18 revenue declined by 24.1% mainly caused by lower sales and progressive billings from both property development and construction segments. Property investment segment also reported a decline as 4Q is usually stronger for leisure and hospitality. As a result, core PATMI dropped by 27.2%, in tandem with lower revenue for all segments except for quarry and other segments.

YoY. Revenue grew by 20.2% with better contributions from all segments, except for property development, which was impacted by lower sales and progress billings from local projects. Core PATAMI, meanwhile improved by 14.1% driven by better performance from property investment segment.

Outlook. The growing contributions from other pillars such as construction, property investment, trading and manufacturing and building material are expected to drive the earnings growth despite the slowdown in property development.

Property development. New effective sales of RM141m was achieved in 1Q18 while FY18 effective sales target is maintained at RM1bn, underpinned by RM1.6bn of planned launches. Unbilled sales was at RM811m (4Q17: RM861m) representing 0.82x of FY17’s property revenue.

Property investment. Better performance YoY given higher contribution from Sunway Pyramid Hotel (post-refurbishment), new Sunway Velocity Hotel (open since Sept 17), Sunway Velocity Mall and theme parks operations.

Construction. Stronger YoY results due to higher progress billings from local jobs but earnings were affected by lower contribution from precast division. SunCon’s current order book stood at RM6.1bn (3x cover on FY17 revenue) and is targeting RM1.5- 2.5bn new jobs in FY18.

Forecast. FY18-19 earnings are revised higher by 1.5% and 4.0%, respectively due to a minor model up keeping adjustment following the recent released annual report.

Reiterate BUY with unchanged TP of RM2.30 based on a 10% holding discount from SOP-derived valuation of RM2.55 (Figure #2). We see value emerging given the weakness in share price in view of the resilient business model and earnings growth prospect. At a current P/E of 12x, we opine that it is a deep value stock with mature investment properties and underappreciated trading and healthcare businesses.

Source: Hong Leong Investment Bank Research - 22 May 2018