Sunway’s 9M18 result was above market expectations but below ours. Net profit grew 4% yoy to RM467m, driven mainly by property investment, construction and trading/manufacturing earnings growth. But core earnings contracted 2% yoy to RM443m due to accounting changes. We cut our core EPS by 8-16% in FY18-20E to reflect lower construction, property and quarry earnings. We reduce our RNAV/share and target price by 3% to RM2.43 and RM1.94 respectively. Sunway remains our top large-cap property sector BUY.

Held Back by Change in Accounting Changes

Sunway’s net profit of RM467m (+4% yoy) in 9M18 comprised 80% of street’s full-year forecast of RM585m but only 71% of our previous estimate of RM653m. The adoption of MFRS 15 accounting standard led to the change in revenue and profit recognition for its Singapore and China projects on a completion basis compared to the percentage completion basis previously.

Strong Overseas Sales

Sunway recorded strong effective sales of 1.4bn in 9M18 with sales of overseas projects contributing RM0.9bn (65% of total). Its Rivercore Residences project in Singapore and Sunway Gardens project in Tianjin, China, contributed to the bulk of the sales but revenue recognition is only on completion under MFRS 15. The strong effective sales led Sunway to raise its FY18 target to RM1.5bn from RM1.3bn set in 4Q17 previously.

Earnings and TP Cut

We cut our core EPS by 8-16% in FY18-20E to reflect lower construction, property and quarry earnings. We reduce our RNAV/share to RM2.43 from RM2.50 to reflect the warrant dilution and lower construction, property and quarry valuations, partly offset by positive impact of rolling forward our DCF base year to FY19E.

Top Large-cap Sector BUY

Based on the same 20% discount to RNAV, we cut our TP to RM1.94 from RM2.00. Current FY19E core PER of 13x is reasonable, considering the twoyear core EPS CAGR of 12% in FY19-20E. Key risks to our positive view are weaker-than-expected property sales and low construction contract wins.

Higher earnings if not for accounting changes

Sunway’s net profit would have been 23% yoy higher if not for the adoption of MFRS 15. PBT declined 4% yoy to RM597m in 9M18, reflecting the decline in property development (-18% yoy) and investment holding (-73% yoy) PBT; partly offset by higher property investment (+28% yoy), construction (+16% yoy) and trading/ manufacturing (+18% yoy) PBT.

Diversification Advantage

We continue to like Sunway for its integrated property-development business model, complemented by its construction, trading, quarry, healthcare and education businesses (non-property businesses contributed 46% of PBT in 9M18). Construction order book of RM5.2bn and in-house projects will sustain its construction earnings despite the slowdown in public-sector project awards.

Source: Affin Hwang Research - 22 Nov 2018