• Sunway reported a surprise net loss of RM6.7m in 2Q20, mainly due to one-off losses, reducing the net profit to RM71.6m in 6M20 (-81% yoy).
• Excluding net forex and exceptional losses of RM30.3m, core net profit fell 67% to RM101.9m in 6M20. We expect a turnaround in 3Q20 as operations have resumed.
• But prospects remain challenging for the group due to a slow recovery in the property and construction sectors. We maintain our HOLD call with a reduced 12-month target price (TP) of RM1.35, based on a 40% discount to RNAV.

Below Expectations

Sunway’s 6M20 net profit of RM72m comprises 16-17% of the consensus and our previous full-year forecasts of RM441m and RM425m respectively. We were surprised by the impairments for inventories, receivables, associates (fair value loss for investment properties) and fixed assets, and forex losses totalling RM30m. We cut our 2020 net profit forecast to RM416m to reflect the exceptional and forex losses in 6M20, partly offset by a RM40m gain from the disposal of The Pinnacle Sunway by end-2020.

Fall in Revenue as Activities Were Disrupted

Revenue plunged 31% yoy to RM1.53bn in 6M20 with a sharper fall in 2Q20 (-43% yoy) as the full impact of the Movement Control Order (MCO) was felt. Its leisure and hospitality and retail mall operations were closed during the MCO and saw a slow resumption of activities in 2Q20. Similarly property development and construction activities came to a standstill but it still managed to clock in effective property sales of RM586m in 6M20. Core net profit fell sharply by 67% yoy to RM102m in 6M20 with the resulting profit margin squeeze, which was partly mitigated by cost-saving measures.

Asset Disposal and ICPS Issuance Pending

Sunway’s proposed disposal of The Pinnacle Sunway office building to 37.3%-owned associate Sunway REIT for RM450m is expected to be completed by end-2020 for a gain of RM40m. The disposal is positive as it will realise the value of a matured asset. Sunway has also proposed a rights issue of Irredeemable Convertible Preference Shares (ICPS) on the basis of 1 ICPS for every 5 shares held to raise at least RM612.7m. Both corporate exercises are expected to reduce its net gearing of 0.47x as at end-June and raise cash to part-finance the development of new hospitals and potential acquisition of quarries. We cut our RNAV/share estimate to RM2.25 from RM2.33 previously to reflect the higher net debt. Based on the same 40% discount to RNAV, we reduce our TP to RM1.35 from RM1.40. We maintain our HOLD call

Source: Affin Hwang Research - 26 Aug 2020