Sunway reported 1QFY21 core PATMI of RM57.2m (-74.6% QoQ, -12.0%YoY) which was below our and consensus expectation largely due to lower contribution from hospitality and leisure businesses as well as lower progressive billing. New sales of RM1.16bn was achieved in 1QFY21 representing 72.5% of Sunway’s FY21 sales target of RM1.6bn. Despite the earnings miss during the quarter, we expect it to pick up momentum strongly in 2H, albeit at slower pace than initially thought (given the unavoidable onslaught of MCO3.0). We cut earnings by 26% in FY21-22 to account for slower progressive billing as well as slower recovery in the group’s property investment segment. We maintain our BUY call with a lower TP of RM1.90 (from RM1.95) based on a 10% holding discount to a SOP-derived value of RM2.11.

Below expectations. Sunway reported 1QFY21 core PATMI of RM57.2m (-74.6% QoQ, -12.0%YoY). The results were below expectation accounting 9% of our and 11% of consensus full year forecasts. The deviation was largely due to lower contribution from hospitality and leisure businesses under the property investment segment as well as lower progressive billing recognition under property development segment. No dividend was declared.

QoQ. Core PATMI declined by 74.6% due to lower revenue by 20.4% owing to lower contributions from most business segments except property investment. Overall, revenue was lower due to lower progressive billings for property development and construction segment. Healthcare revenue was also lower due to the impact of MCO2.0 which hit Sunway Medical Centre (SMC).

YoY. Core PATMI decreased by 12% despite registering higher in revenue by 4.7% on the back of poorer results from the property investment segment from MCO2.0 (SPLY had only 2 weeks impact) as well as the disposal of “The Pinnacle Sunway”.

Property development. New sales of RM1.16bn was achieved in 1QFY21 representing 72.5% of Sunway’s FY21 sales target of RM1.6bn. Unbilled sales rose to RM3.3bn as at 1Q21 from RM2.4bn in 4Q20 from the launches of the Group’s Singapore property development projects, Parc Central Residence, which can only be recognised upon completion. Hence, we are expecting better contribution from this project moving forward.

Property investment. We anticipate the segment to remain challenging in near term due to spike in cases that prompt a more stringent movement.

Construction. Current orderbook stands at RM5bn which implies a healthy cover of 3.2x on FY20 construction revenue. 1Q21 saw RM462m order book replenishment where it mostly came from the Sunway Medical Centre Damansara and precast projects. Furthermore, the division is benefitted from the group's wide expansion in healthcare with several hospitals buildings.

Healthcare. Overall performance in 1Q21 vs SPLY saw improvements due to higher number of admissions and outpatient treatments after the MCO2.0 was lifted in early March. The performance of Sunway Medical Centre Velocity continued to improve in the current quarter, registering a lower operating loss of -RM4.2m compared to SPLY.

Forecast. We cut our earnings forecast by 26% in FY21-22 to account for slower progressive billing as well as slower recovery in the group’s property investment.

We maintain our BUY call with a lower TP of RM1.90 (from RM1.95) based on a 10% holding discount to a SOP-derived value of RM2.11. Despite the earnings shortfall this quarter, we expect the group to pick up momentum strongly in 2H albeit at slower pace than initially thought. Sunway remains our top pick given its well -integrated property, construction and building material operations. Its fast expanding healthcare business has yet to be appreciated as it is embedded within the parent -co. Hence, the impending divestment to a strategic shareholder could reveal the underlying value of the healthcare business. This, coupled with the resilient earnings from matured 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 - 27 May 2021