Sunway’s 9MFY19 core PATMI of RM416.8m (+2.3% YoY) was within expectations given the expectation of a strong 4Q19 as Sunway is expected to recognise the Tianjin project. 9M19 effective sales stood at RM720m (72% of FY19 target) while unbilled sales stood at RM2.1bn (cover ratio of 3.4x). We tweak our FY19/20/21 earnings forecasts marginally by -1.0%/-1.2%/-3.4% and maintain our BUY rating with an unchanged TP of RM2.17 based on a 10% holding discount from SOP-derived valuation of RM2.41.

Within expectations. Sunway’s 3QFY19 core PATMI of RM166.9m (+49.2% QoQ, +14.8% YoY), brings the 9MFY19 sum to RM416.8m (+2.3% YoY), forming 66.4% and 67% of ours and consensus full year forecasts, respectively. We deem this within expectations as we note that Sunway is expected to recognise a lumpy recognition of earnings (c.RM55m) from the Tianjin project in 4Q19, due to MFRS15. The 9MFY19 core PATMI sum has been arrived after subtracting RM43.6m in disposal gains from the sale of Sunway University (concluded in Apr), RM30.2m in reversal of provision for deferred taxation, and a RM43.6m revaluation gain. No dividends were declared.

QoQ. Core PATMI increased 49.2% to RM166.9m largely due to higher progressive billings from the property development segment coupled with improvements from the investment holdings segment (i.e. treasury operations).

YoY. Core PATMI fell -14.8% in tandem with the decrease in revenue from all segments except the quarry segment.

YTD. Core PATMI remained relatively flat (+2.3%) at RM416.8m as the lower revenue (-15.2%) recorded was offset by improvements from the investment holdings segment coupled with a lower effective tax rate.

Property development. New effective sales of RM210m was achieved in 3Q19, bringing 9MFY19 effective sales to RM720m, representing 72% of its full year target. Unbilled sales stood at RM2.1bn, representing a strong cover ratio of 3.4x on FY18’s property revenue. Sunway has revised its GDV launch target for FY19 downwards as the Brookvale launch has been replaced by Sunway Avila (Tower B). Nonetheless, we note that the delay is rather minor (i.e. less than 6 months) and management still maintains its FY19 effective sales target of RM1bn.

Construction. SunCon reported 9MFY19 core earnings of RM97.8m (-10% YoY) while current orderbook stands at RM5.6bn which implies a healthy cover of 2.5x on FY18 construction revenue.

Healthcare. The healthcare segment reported a healthy RM50.4m PBT (9MFY19), well 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. We tweak our FY19/20/21 earnings forecasts marginally by -1.0%/-1.2%/- 3.4% post model up-keeping and imputing higher distribution to sukuk holders.

Maintain BUY with an unchanged TP of RM2.17 based on a 10% holding discount from SOP-derived valuation of RM2.41. Sunway remains our top pick given its well integrated property and construction segments. Its hidden gem, the healthcare business (with 4 new hospitals coming on stream over the next three years) has yet to be appreciated as it is embedded within the parent-co. These coupled with the resilient earnings from mature investment properties alongside its growing building materials business and quarry operations justifies for the re-rating of the stock.

Source: Hong Leong Investment Bank Research - 22 Nov 2019