Period  3Q14/9M14

Actual vs. Expectations 9M14 core net earnings of RM385.7m is considered within expectations as it made up 71% and 80% of our, and consensus‘, full-year estimates, respectively.

 Its 9M14 property sales of RM1.2b was slightly behind the curve as it only makes up 67% of our, and management’s, FY14E sales target of RM1.8b. We believe conversion of bookings to sales had been slower than expected resulting in the shortfall.

 Thus far, SUNWAY has replenished its internal orderbook by another RM881m, and 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, 9M14 core earnings continued to grow steadily, by 18.6% to RM385.7m underpinned by a 5% revenue growth and more significantly, continuous improvements in its operating margins to 12.1% (+2.5ppt). While property investment and construction (the two major drivers) registered revenue growth of 24.4% and 1.8%, the property division dragged down overall growth as the segment saw weaker progressive billings. Property investment enjoyed new income streams from its newly completed Sunway Pinnacle and Monash University campus extension while leisure and hospitality divisions reported better contributions. Its property development division boosted the expansion in operating margin due to lower common infrastructure cost allocated to the property development component within some of the integrated projects.

 QoQ, its 3Q14 core earnings increased by 18.5% to RM149.3m despite a lower revenue of RM1134.0m (-6%) mainly due to further improvements on its operating margin which increased by another 2.8ppt to 13.9%, lifted by its property development division, which saw its operating margin soaring by 25.3ppt to 44.5% due to lower common infrastructure cost and higher profit recognition for Sunway Damansara.

Outlook  We think the main reason that 9M14 sales is proportionately behind management’s and our FY14E sales target of RM1.8b, is due to: (i) slower-than-expected conversion of booking to SPA sales, (ii) less launches for 1-2 month period running up to Budget announcement. We expect Sunway to ramp up launches totalling to RM830.0 GDV worth of projects like Citrine Service Apartment, Sunway Cassia and Sophia Hills in Singapore.

 Its property unbilled sales remain strong at RM2.8b providing at least 1 – 1.5 years earnings visibility.

 We are still hopeful that SUNWAY is able to secure some sizeable external orderbooks worth c.RM1.0n in 4Q14/1Q15.

Change to Forecasts No change in our earnings estimates at this juncture.

Rating Maintain OUTPERFORM

Valuation  We reiterate our OUTPERFORM call on SUNWAY with our SoP driven Target Price of RM3.87 that implies 18% discount to our FD SoP of RM4.74 (refer overleaf). We expect the listing of its construction arm by 1H15 and newsflow will be buoyed by more external jobs of (i) RM1.0b by end FY14 and (ii) RM1.5b for FY15.

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

Source: Kenanga