Sunway’s 1HFY19 core PATMI of RM256.9m (-1.3% YoY) was within expectations given the expectation of a stronger 2H. 1H19 effective sales stood at RM510m (51% of FY19 target) while unbilled sales stood at RM2.1bn (cover ratio of 3.4x). Minimal changes to forecast after imputing SunCon’s latest earnings. Maintain BUY with TP of RM2.17 (from RM2.18) based on a 10% holding discount from SOP-derived valuation of RM2.41 after imputing SunCon’s latest TP.

Within expectations. Sunway’s 2QFY19 core PATMI of RM118.8m (-13.9% QoQ, - 15.4% YoY), brings the 1HFY19 sum to RM256.9m (-1.3% YoY), forming 41% of ours and consensus full year forecasts. We deem this within expectations as we note that 1H typically makes up 45% of full year earnings coupled with a lumpy recognition of earnings (c.RM55m) from the Tianjin project to be recognised by 4Q19, due to MFRS15. Despite strong reported headline earnings (RM361.4m, +13.2% YoY), the 1HFY19 core PATMI sum has been arrived after subtracting RM43.6m in disposal gains from the sale of Sunway University (concluded in Apr), RM23.3m in reversal of provision for deferred taxation, and a RM43.6m fair value gain from revaluation.

Dividend. Proposed first interim dividend of 3 sen per share and a distribution of 1 treasury share for every 100 existing shares (based on closing price RM1.57), bringing 2QFY19 proposed dividend effectively to 4.57 sen per share (2QFY18: 3.5). We are positive on the recently proposed dividend and believe FY19 dividends to be able to record up to 9 sen per share, representing a 5.7% yield.

QoQ. Core PATMI decreased -13.9% to RM118.8m in tandem with the decrease in revenue from property investment, construction and trading/manufacturing segments coupled with lower net interest.

YoY. Core PATMI fell -15.4% in tandem with the decrease in revenue all segments except property development and the healthcare segments.

YTD. Core PATMI remained relatively flat (-1.3%) at RM256.9m as the lower revenue (-13.4%) recorded was offset by higher net interest.

Property development. New effective sales of RM338m was achieved in 1Q19, bringing 1H19 effective sales to RM510m, representing 51% of its full year target. Unbilled sales stood at RM2.1bn, representing a strong cover ratio of 3.4x on FY18’s property revenue.

Construction. SunCon reported 1HFY19 core earnings of RM62.2m (-13% YoY) while current orderbook stands at RM5.8bn which implies a healthy cover of 2.6x on FY18 construction revenue.

Healthcare. The healthcare segment reported a healthy RM34.7m PBT (1H19), which is in line with our full year expectations of c.RM60m. We expect the initial operating losses of the new hospital to be offset by the increasing contributions from SMC3.

Forecast. Minimal changes after imputing SunCon’s latest forecast.

Maintain BUY with TP of RM2.17 (from RM2.18) based on a 10% holding discount from SOP-derived valuation of RM2.41 (Figure #2) after imputing SunCon’s latest TP (RM2.16 from RM2.24). Despite the down cycle of both property development and construction sectors, we continue to like its resilient integrated real estate business model and earnings growth prospect with mature investment properties and underappreciated trading and healthcare businesses.

Source: Hong Leong Investment Bank Research - 28 Aug 2019