• Sunway saw a strong 3.5-fold qoq increase in core earnings to RM90m as operations resumed in 3Q20 as the government’s Movement Control Order (MCO) restrictions were eased.
• But core earnings were below expectations and fell 67% yoy to RM175m in 9M20 on weaker performance for all segments except its quarry operation.
• We cut our core EPS by 8-18% in 2020-22E to reflect a slower operational recovery. Maintain our HOLD call with RM1.35 target price (TP), based on 40% discount to RNAV.

Below expectations

Sunway reported net profit of RM204m (-64% yoy) in 9M20, which only comprised 48-52% of market consensus and our previous full-year forecasts of RM390-426m. The bottom line was lifted by net exceptional gains of RM29m, mainly for the gain on remeasurement of leases on signing new Master Lease Agreements for some hotels. The weaker-than-expected recovery in 3Q20 was due to slower-than-expected progress billings for property projects, weak demand for its healthcare and hospitality businesses due to weak consumer sentiment and border restrictions. Revenue fell 25% yoy to RM2.56bn in 9M20 with lower revenue reported for all divisions except quarry (flat). PBT fell 56% yoy to RM289m with all divisions having reported weaker performance and profits margins except quarry operation.

Reasonable property sales

Sunway achieved property sales of MR943m (effectively sales of RM809m) in 9M20 compared to RM1.1bn (effective sales of RM720m) in 9M19. Half of the sales came from its projects in Singapore, driven by pent-up demand following the lifting of the Circuit Breaker. The company is on track to achieve its revised target sales of RM1.1bn in 2020. High new construction contract wins of RM2.3bn YTD, improves construction earnings visibility. In 3Q20, Sunway completed the sale of The Pinnacle office building Sunway REIT, purchase of Dolomite’s quarries and land in Kelantan for future hospital expansion to restructure the group for long-term growth.

Maintain HOLD call

Prospects for Sunway remains challenging as we expect a slow recovery for its hospitality and healthcare businesses. But lumpy revenue recognition for its China and Singapore property sales in 4Q20 will mitigate the impact. We reiterate our HOLD call with RM1.35 target price, based on a 40% discount to RNAV. Key upside/downside risks are higher/lower property sales and new contract wins.

Source: Affin Hwang Research - 30 Nov 2020