Modest Results, Within Expectations

Sunway reported a modest set of results – 1Q18 core net profit grew by 10% yoy to RM122m on higher earnings from the property investment segment and a lower tax rate. The results were within market and our expectations. We reiterate our BUY call with an unchanged RNAV-based 12-month TP of RM2.05. We continue to like Sunway for its integrated property-development business model, complemented by its established presence in the healthcare and education businesses. Current valuations of 11x 2018E PER / 4% yield look attractive.

1Q18 Core Net Profit Grew by 10% Yoy, Within Expectations

Sunway’s 1Q18 core net profit of RM122m (+10% yoy) was within market and our expectations, accounting for 20% of the street’s and 18% of our 2018 forecasts. The stronger earnings were mainly attributable to higher pretax profit from the property investment segment (+41% yoy), driven by higher earnings from Sunway Velocity Mall, the opening of Sunway Velocity Hotel in Sep17 and completion of refurbishment at Sunway Pyramid Hotel. Elsewhere, a lower effective tax rate of 19% (from 25% in 1Q17) helped lift core net profit. This note marks a transfer of coverage.

Sequentially, Core Profit Fell by 35%

Sequentially, Sunway’s 1Q18 core net profit fell by 35% qoq from the seasonally stronger 4Q on lower pretax profit contributions from the propertydevelopment and construction segments. For the property-development segment (1Q18 PBT fell by 78% qoq to RM24m), there were less completions and handovers compared to the seasonally stronger 4Q. Similarly, the construction segment also reported a lower 1Q18 PBT (-31% qoq) due to lower progress billings.

Maintain BUY With An Unchanged Target Price of RM2.05

We maintain our earnings forecast, BUY recommendation and 12-month TP of RM2.05, based on a 20% discount to RNAV. We expect Sunway’s earnings to pick up in the coming quarters on higher contributions from the propertydevelopment (RM947m unbilled sales) and construction segments (RM6.1bn outstanding orderbook). We continue to like Sunway for its integrated propertydevelopment business model, complemented by its healthcare and education businesses. Key risks to our positive view are weaker-than-expected property sales and low construction contract wins.

Source: Affin Hwang Research - 22 May 2018