FY16 CNP of RM541.6m exceeded our/streets’ full-year estimates by 12%/6%. FY16 sales of RM1.2b came in higher than our/management’s target of RM1.1b. 7.14 sen dividend declared, bringing full-year dividend to 12.14 sen which is also higher than our estimate of only 9.8 sen. Raised FY17E CNP by 6.5% and rolled out our FY18E CNP of RM542.6m. Maintain MARKET PERFORM, with a higher SoP-driven Target Price of RM3.24 (previously, RM3.23).

Above expectations. Exceeding our/streets’ full-year estimates by 12%/6%, SUNWAY’s FY16 CNP of RM541.6m was above expectations, due to better-than-expected development margins and also higher contribution from its others division. Its full-year property sales of RM1.2b also surpassed our and management’s targets of RM1.0b and RM1.1b, respectively. However, we do note that management had scaled back its initial FY16 sales target of RM1.4b to RM1.1b back in Oct 2016. In terms of dividend, 4.0 sen cash dividend and 1 treasury share for every 100 shares held (translating to 3.14sen/share) was declared in 4Q16, bringing its full-year dividend declared to 12.14 sen which is higher than our full-year dividend estimate of 9.8 sen.

Results review. FY16 CNP saw a decline of 9% despite 6% growth in revenue, as its performance was dragged down by several divisions, which reported lower operating profits, i.e. property investment (-24%), construction (-19%), and quarry division (-32%). The sharp decline in margins of 10ppt to 19% for its property investment division was mainly due to higher operational costs due to the pre-opening expenses incurred for Sunway Velocity, provisions made for the termination of Sunway International Vacation Club and the impairment for BRT Park N’ Ride facilities. QoQ, the 15% improvement in its 4Q16 CNP was mainly driven by its property development division, which saw 163% increase in operating profit on the back of a revenue growth of 25% due to the handover of Sunway Geo Retail Shops and Flexi Suites Phase 1 coupled with the sale of Penang land to Sunway REIT. Consequently, its property development margin also improved significantly by 18ppt to 34%.

Raising FY17E earnings. Post results, we raised our FY17E CNP by 6.5% to RM521.7m after we factored in higher contribution from its other division and also fine-tuned our development margin assumptions. That said, we also take the opportunity to introduce our FY18E CNP of RM542.6m.

Outlook. We remain confident with SUNWAY’s ability in delivering a sturdy performance for the year premised on its strong unbilled sales of RM1.5b with 2-year visibility, a robust outstanding order book of RM4.8b that provides 2-3 year visibility and other divisions that has been generating decent growth over the years.

MARKET PERFORM. We continue to maintain our MARKET PERFORM recommendation on SUNWAY but tweaked our SoP- driven Target Price higher to RM3.24 (previously, RM3.23), after we have factored in the changes in valuation on its other divisions, i.e. SUNREIT, which saw an upgrade in TP to RM1.74 (previously, RM1.68), while SUNCON saw a downgrade in TP to RM1.77 (previously, RM1.81). However, we are still maintaining our cautious view on the property market as we have yet to see much improvement in the market, especially bank loan approvals.

Downside risks to our call include: Weaker-than-expected property sales and construction order book replenishment, Higher- than-expected sales and administrative costs, negative real estate policies, and tighter lending environment.

Source: Kenanga Research - 28 Feb 2017