1Q17 CNP of RM107.9m was within ours but below streets? full-year estimates, potentially due to more aggressive assumption on its property development margins and billings progress. Property sales of RM142.0m were also slower compared to house and management?s target of RM1.1b. No dividends declared as expected. No changes to our FY17-18E core earnings. Downgrade to MARKET PERFORM with a higher SoP- driven Target Price of RM3.50 (previously, OP; TP: RM3.41).

A slow start? SUNWAY?s 1Q17 CNP of RM107.9m was within ours but below streets? full-year estimates at 21%/19%, respectively. Property sales registered in 1Q17 was sharply slower at only RM142.0m, vis-�-vis our and managements? target of RM1.1b. We believe that streets? might be slightly aggressive on its assumptions for its property development division margin and billing progress, while its slow sales are due to the lack of new launches.

Results review. Its 1Q17 CNP saw a growth of 6%, YoY premised on several factors, i.e. i) growth in revenue (+2%) driven by all of its divisions except for its property development division, ii) a substantial decrease on its effective interest cost (-58%), iii) lower effective tax rate of 18% versus 19% back in 1Q16, and iv) decrease in minority interest contributions by 57%. QoQ wise, 1Q17 CNP decreased by 35% underpinned by, i) decrease in revenue (-20%) whereby the main drag is from its property development division due to the handover of Sunway Geo Retail Shops and Flexi Suites Phase 1 and the sale of Penang land to Sunway REIT in 4Q16, and ii) decrease in property development operating margins by 29ppt to 5% due to low billings progress from its local developments.

Outlook. While SUNWAY might have kicked off the year with a slower set of results, we remain confident with SUNWAY?s ability in delivering a sturdy performance for the year premised on its strong unbilled sales of RM1.4b with 2-year visibility, a robust outstanding order book of RM4.6b that provides 2-3 year visibility and other divisions that has been generating decent growth over the years. That said, we also expect its sales to pick up once it launch its RM2.0b worth of projects, resulting its development margins to normalise from 2Q17 onwards.

MARKET PERFORM. We downgrade our recommendation on SUNWAY to MARKET PERFORM (previously, OUTPERFORM) but tweaked our SoP-driven Target Price higher to RM3.50 (previously, RM3.41), after we have updated in the changes in valuation on its other divisions, i.e. SUNREIT and SUNCON. SUNREIT saw an upgrade in TP to RM1.80 (previously, RM1.74) while SUNCON from TP of RM1.77 to RM2.00. Nonetheless, we are still maintaining our cautious view on the property market as we have yet to see much improvement in the market.

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 - 30 May 2017