Period

3Q15/9M15

Actual vs. Expectations

SUNWAY’s 9M15 core net profit of RM414.2m is within expectations, accounting for 73% and 75% of our and streets’ full-year estimates, respectively.

In terms of property sales, it registered sales of RM734m, in-line with our FY15 sales assumptions of RM1.0b (reduced from RM1.7b, previously) but slightly behind managements’ target of RM1.1b. However, we do note that management did scale down its sales target back in Oct-15, from its initial target of RM1.7b to RM1.1b.

Dividends

No dividend was declared, but a special dividend of 26.0 sen was paid from SUNCON’s listing proceeds.

Key Results Highlights

YoY, SUNWAY managed to grow its 9M15 core net profit by 7% to RM414.2m, albeit a slump in revenue (-9%). In general, the improvements in earnings were mainly driven by several factors i.e. (i) stronger operating profit in most of its divisions i.e. construction (+69%), property investment (+44%), quarry (+66%) due to improvements in margins, (ii) reduction in net interest cost (-79%), and (iii) lower minority interest contribution (-20%). That said, it’s trading and property divisions did not fare as well as the other divisions with a decline in operating profit by 21% and 41%, respectively. The decline in operating margin for its property division was mainly due to lower contribution from its Singaporean projects.

QoQ, while its 3Q15 revenue declined by 9%, its core net profit still grew by 10% to RM147.0m due to similar reasons mentioned above i.e. (i) registering net interest income of RM15.8m vis-à-vis net interest cost of RM9.3m, and (ii) lower minority interest contribution (-38%).

Outlook

Its property unbilled sales remain fairly healthy at c.RM2.3b, providing at least 1–1.5 years of visibility.

We believe that SUNWAY will ride on the construction contract flows expected in early 2016, such as the MRT2 and LRT3 projects given their strong track records in such infrastructure projects.

Change to Forecasts

Unchanged.

Rating

Maintain MARKET PERFORM

Valuation

Maintain MARKET PERFORM call on SUNWAY.

We believe that SUNWAY’s construction arm, SUNCON, will ride on strong construction contract flow expected in early 2016, such as MRT2, LRT3, BRT and more infrastructure projects.

However, we reckon that the lacklustre sentiment in the property market will cap further upsides. Additionally, we expect its FY16E earnings to decline as well.

No changes to our SoP-driven Target Price of RM3.27. Our applied discount of 54% on its property division is close to our overall sector average discount of 50%.

Risks

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

Higher-than-expected sales and administrative costs.

Negative real estate policies.

Tighter lending environments.

Source: Kenanga Research - 27 Nov 2015