Period  2Q14/1H14

Actual vs. Expectations In 1H14, Sunway Berhad (SUNWAY) registered core net earnings of RM236.4m which is broadly inline, at fulfilment rates of 43% and 47%, for house and consensus full-year forecasts, respectively.

 Its 1H14 property sales of RM807.0m are also on track with ours and management’s FY14E sales target of RM1.8b. The major sales driver for 1H14 sales comes from Geo Residences and Velocity, which made up 21% and 26% of total sales, respectively.

 However, SUNWAY has only replenished its internal orderbook by another RM531m, and has yet to secure any external orderbook replenishments todate versus our assumptions of RM1.5b. This is expected as management has guided that some sizeable orderbooks will come in towards 4Q14,

Dividends  A first interim dividend of 5 sen was declared well ahead of our full-year net dividend estimates of 7.8 sen. To recap, SUNWAY announced a total dividend of 10 sen back in 2013 which implied a 36% payout ratio from its core net profit. Hence, we are adjusting dividend payout ratio accordingly as we believe that SUNWAY would be able to at least maintain its dividend of 10vsen as per last year that implies a net dividend yield of 3.2%.

Key Results Highlights YoY, SUNWAY’s 1H14 core earnings grew steadily by 17.7% underpinned by the growth in revenue (+4.3%) coupled with improvements in its EBITDA margins to 9% (+2ppt). The growth in revenue was driven by most divisions i.e. property development (+7.1%), construction (+1.5%), trading and manufacturing (+14.4%), quarry (+6.3%), except for property investment which saw a marginal decline (-1.5%), while the margin expansion was mainly driven by the core operating margin improvements from its property development division that improved by 6.7ppt to 21% due to higher contribution from the Klang Valley projects like Sunway Velocity and Sunway South Quay.

 QoQ, SUNWAY registered a 14.2% growth in core earnings, driven by revenue growth of 17%, thanks largely to the property development division (+35.7%) and construction (+6.8%) that makes up 63% of total revenue due to better progress billings. Notably, its quarry division has also been registering impressive core operating profit growth of 107.3% to RM9.2m due to strong local demand supported by the massive infrastructure construction works on-going in Klang Valley and housing development in Malaysia.

Outlook  Management is on track to meet its sales target of RM1.8b on the back of RM2.3b targeted launches as they already registered RM807.0m worth of property sales in 1H14. To date, SUNWAY has already launched approximately RM1.2b worth of properties and its Sunway Geo Residence 2 and Citrine office suites received overwhelming response with bookings of 70% and 100%, respectively.

 Its unbilled sales remain fairly strong at RM2.4b with remaining external orderbook of RM1.9b that easily provides another 1-1.5 years visibility.

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

Rating Maintain OUTPERFORM

Valuation  We reiterate our OUTPERFORM call on SUNWAY with our SoP driven Target Price of RM3.70 that implies 19% discount to our FD SoP of RM4.58 (refer overleaf) for its steady property sales and also strong construction track record in which we are expecting SUNWAY to bag at least another RM1.0b worth of external construction jobs by year end.

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

Source: Kenanga