Period  1Q14

Actual vs. Expectations Sunway Berhad (SUNWAY) registered core net earnings of RM110.3m for 1Q14, which is within our forecast and streets’ expectation at fulfilment rates of 20.4% and 22.6%, respectively.

 1Q14’s property sales of RM348m are considered broadly inline with management’s and our sales estimate of RM1.8b. The key driver for 1Q14 sales are Geo Residences, which made up 40% of total sales, which were launched towards end 4Q13. Considering that the group launched only two projects, i.e. Sunway Wellesley and Sunway Eastwood in 1Q14 with a total GDV of RM205m, the achieved sales is commendable as it made up 19% of targets. Furthermore, the amount of GDV launched in 1Q14 only makes up 8.9% of their FY14E planned launches of RM2.3b, as more launches are skewed towards 2H14.

 However, SUNWAY has only replenished its internal orderbook by another RM178m, and has yet to secure any external orderbook replenishments to date versus our assumptions of RM1.5b.

Dividends  No dividend was declared, as expected

Key Results Highlights YoY, SUNWAY’s reported core net profit rose by 22.1% from RM90.3m to RM110.3m, despite a flattish revenue of RM1025.7m (+0.5%). Its revenue remains flattish as the growth from its property development (9.7%), construction (1.8%) and quarry division (+13.3%) was offset by lower revenue contribution from its trading & manufacturing (-8.5%), and investment holding (-33.9%). The improvement of its core earnings was due to 2.9ppt expansion in its core operating margins to 11.3% underpinned by the better margins recorded in its property development division of 23.4% (+10.8ppt) followed by its construction division core operating margin of 7.1% (+0.7ppt).

 QoQ, its core earnings of RM110.3m decreased by 29.7% due to lower revenue of RM1025.7m (-24%) as all major divisions registered seasonally weaker results. This is typical for Sunway as their 1Qs tend to be the weakest and we believe this has to do with seasonal festivities, which affect both billings from the property and construction segment.

Outlook  Moving forward, we still think that management’s sales target of RM1.8b on the back RM2.3b targeted launches is still highly realistic. Reason being that 82% of its upcoming launches are being priced below RM1.0m/unit which is more palatable for the market’s demand for ‘affordability’. We also believe the stock could be re-rated if its upcoming Sunway Iskandar secures strong take-ups. Property unbilled sales of RM2.4b and remaining external orderbook of RM2.9b provides 1-1.5 years visibility.

Change to Forecasts No changes in our earnings estimate at this juncture.

Rating Maintain OUTPERFORM

Valuations  Raised our SoP based TP to RM3.62 from RM3.33 (refer overleaf). We reiterate our OP call on SUNWAY for its synergistic business, which enriches its core driver as an integrated township developer. We also like the group for its strong orderbook replenishments and being a beneficiary the KVMRT 2 project. The stock is our 1Q14 Top Pick and has done well to date with 17.3% YTD returns.

Risks to Our Call  Failure to meet sales targets or replenish landbank. Sector risks, including overly negative policies.

Raising SoP driven TP to RM3.62 from RM3.33. Currently, we apply 40%-50% property RNAV discount on large cap developers that came below expectations in terms of sales (e.g. UEMS, IOIP, UOA, TROPICANA). Developers which met our expectations in terms of sales (e.g. IJMLAND, MAHSING) are being pegged at 15% to 30% property RNAV discount rates. Hence, we believe that Sunway deserves a narrower property RNAV discount as they have met our expectations and thus, we narrow its property RNAV discount from 40% to 30%.

Source: Kenanga