Most of Sunway’s operations were disrupted by the Covid-19 pandemic and the government’s Movement Control Order (MCO). Net profit fell by 43% yoy to RM78m in 1Q20 due to weaker construction, property investment and trading earnings. The higher-than-expected contraction in earnings leads us to cut our earnings by 14-36% in 2020-22E. We believe Sunway’s long-term prospects are good. However, the proposed RM1.1bn issuance of preference shares will likely lead to share overhang. We maintain our HOLD rating with a higher TP of RM1.61.

Below Expectations

Net profit of RM78m (-43% yoy) in 1Q20 made up 11-12% of consensus and our going-in full-year forecasts of RM663-699m. The reported revenue and profit margin were below our expectations. Disruptions from the pandemic and MCO led to slower progress billings for its construction (led to a cut in SunCon earnings earlier), lower property investment, leisure and hospitality earnings.

Robust Property Sales

Revenue fell 14% yoy to RM971m in 1Q20 due to lower revenue for its property investment (-32% yoy), construction (-37% yoy) and trading (-23% yoy) divisions. The property development (+58% yoy), quarry (+68% yoy) and healthcare (+18% yoy) segments fared better in generating revenue. Sunway achieved effective property sales of RM522m in 1Q20, a more than three-fold increase from RM172m in 1Q19. Effective unbilled sales remain high at RM2.6bn, while its construction order book was also high at RM5.4bn.

Earnings Cut

PBT fell 39% yoy to RM108m in 1Q20, mainly due to lower construction (-48% yoy), property investment (-44% yoy) and trading (-92% yoy) earnings, while its healthcare division incurred a loss of RM4.5m. As a result, core net profit plunged 40% yoy to RM82m in 1Q20. The earnings outlook remains challenging in 2Q20 due to the extension of MCO to 9 June but business activity has gradually resumed. We cut our core EPS by 14-36% in 2020-22E to reflect lower earnings for all its divisions due to the impact of the pandemic.

Maintaining Our HOLD Call With a Higher TP of RM1.61

We raise our fully-diluted RNAV/share to RM2.31 from RM2.25 to reflect our higher TP for SunCon and the rolling forward of our DCF valuation base year to 2021E (from 2020E) in our property division. Applying the same 30% discount to RNAV, we lift our 12-month TP to RM1.61 from RM1.54 previously. We maintain our HOLD rating. Upside/downside risks: faster-than-expected recovery/prolonged weakness in the property market.

Source: Affin Hwang Research - 28 May 2020