Period

1Q15

Actual vs. Expectations

SUNWAY’s 1Q15 core net profitof RM133.2m came in well within expectations, accounting for 22% and 23% of our and streets’ full-year estimates, respectively.

As for property sales, it registered sales of RM247.0m, which only accounts for 15% of both our and management’s FY15 target of RM1.7b. However, we deem the sales to be still inline as 1Qs are generally the weakest/slowest quarters for SUNWAY.

Dividends

No dividends were declared, as expected.

Key Results Highlights

YoY, SUNWAY’s 1Q15 core net profit saw an impressive improvement by 21%, underpinned by marginal revenue growth of 3% coupled with 3ppt improvements in operating margin to 14%. The marginal improvement in revenue was driven by almost all divisions due to better progressive billings on its on-going local construction projects, sales of precast concrete products in Singapore, pre-GST demand for hardware and stronger sales of premix; the exception is the property division which saw a decline of 19% due to slow progressive billings. Their operating margins were lifted by its construction and quarry division, which improved by 4ppt and 5ppt, respectively.

QoQ, 1Q15 revenue was down by 28% followed with a 35% decline in core net profit. The significant decrease in revenue was mainly due to slow progressive billings from its property division coupled with the fact that their property division had completed several projects back in 4Q14. Positively, its trading and manufacturing division registered a spike in operating profit by 84%, supported by revenue growth of 11%, driven by better sales in Malaysia due to pre-GST demand surge.

Outlook

Its property unbilled sales and outstanding external construction orderbook remains fairly healthy at RM2.5b and RM1.7b, respectively, providing at least 1–1.5 years of visibility.

The listing of its construction arm, i.e. SUNCON is still right on track, scheduled for mid-2015, and we are expecting them to secure at least RM1.0b worth of external orderbook replenishments for FY15.

Change to Forecasts

No changes to our FY15-16E earnings.

Rating

Downgrade to MARKET PERFORM

Valuation

We are downgrading SUNWAY to MARKET PERFORM (previously, OUTPERFORM). Post the listing of SUNCON, we expect our SOP-based TP of RM3.78 to be adjusted down to RM3.35, with the last traded share price hypothetically lowered from RM3.52 to RM3.28, based on our scenario analysis (refer overleaf). This would imply a limited total upside of 5%. Meanwhile, we are comfortable with our SOP assumptions considering we have applied better-than-sector average valuations for each segment. More glaring is SUNWAY’s YTDshare price performance of 12%,which which ranks it as one of the top-performing developers this year against the KLPRP’s -0.3%. Post SUNCON listing, we see no near-term catalysts and expect the stock to take a breather.

Risks to Our Call

Stronger-than-expected property sales and construction orderbook replenishment.

Better real estate policies.

Easier lending criteria.

Source: Kenanga Research - 27 May 2015