We deem its 1H18 CNP of RM262.2m as below expectations, albeit making up 46%/43% of our/consensus estimates. 1H18 property sales of RM840.0m are ahead to meet our/management’s full-year sales target of RM1.2b/RM1.3b. A 3.5 sen dividend declared, making up 56% of our full-year expectation. Raised sales target from RM1.2b to RM1.4b but trimmed FY18-19E CNP by 5-3%, respectively. Reiterate MP with a lower SoP-driven TP of RM1.55 (from, RM1.60).

Below expectations. 1H18 CNP of RM262.2m makes up 46%/43% of our and consensus full-year estimates. However, we deem that it came short of our/consensus expectations primarily due to the recent disappointing construction division performance and weaker-than- expected billings from local projects which we believe will remain slow in subsequent quarters. Positively, it registered property sales of RM840.0m (bulk from Singapore) in 1H18 and is ahead to meet our and management’s target of RM1.2b and RM1.3b, respectively. A 3.5 sen dividend declared, making up 56% of our full-year expectation.

Results highlight. 1H18 CNP grew 6%, YoY underpinned by: (i) its construction, property investment, and trading & manufacturing segments which registered growth in pre-tax profits ranging from 12% to 37%, underpinned by revenue growth of 11-42%, (ii) lower net financing cost (-20%), (iii) decline in minority interest contribution (- 41%) as most of its on-going projects are under group level, and (iv) lower effective tax rate of 12% vis-à-vis 15% in 1H17. QoQ, 2Q18 CNP grew 15% albeit marginal decline in revenue (-2%) due to improvement in margins for most of its business division. Its property development division pre-tax margin expanded by 34ppt to 52% despite revenue declining by 33% as it is driven by recognition of accumulated profits from its development in Singapore.

Outlook. While management has scaled back its planned launches from RM2.0b to RM1.8b, we believe the management and our sales targets of RM1.3b and RM1.2b, respectively, are achievable due to the encouraging take-up in both local and overseas projects. To recap, its Singapore project, i.e. Rivercove, received full take-up upon its launch in April 2018, while its local projects, i.e. Geolake and Citrine Lakehome, sales and bookings are currently recorded at 60-70%. Property unbilled sales of RM1.5b with 1-year visibility and a vigorous outstanding order-book of RM5.8b provide 2-3 years’ visibility. However, we highlight that SUNWAY is only able to recognise RM0.9b of its RM1.5b unbilled sales progressively as the remaining RM0.6b can only be recognised upon completion of its project, i.e. Rivercove, due to the adoption of MFRS 15.

Lowers FY18-19 estimates. Post results, we raised our FY18E sales assumption from RM1.2b to RM1.4b to reflect higher sales from Singapore, but lowered our FY18-19E CNP by 5-3%, respectively, as there is minimal earnings contribution from its Singapore project as its billings can only be recognised upon completion of the project due to MFRS 15 coupled with the downward revision in earnings for SUNCON, and also fine-tuned our development margins.

Maintain MARKET PERFORM, with lower Target Price of RM1.55 (from RM1.60). Currently, we are comfortable with our valuations as follows; (i) applied property RNAV discount of 64% that is close to the sector average of 68%, (ii) premium valuation of 25.0x Fwd. PER to its healthcare division, and (iii) 12.0x FY19E PER to its construction division, which is in line with our big-caps’ range of 12-14x.

Risks include: Weaker-than-expected property sales and construction replenishment, higher-than-expected administrative costs, negative real estate policies, and tighter lending environment.

Source: Kenanga Research - 23 Aug 2018