9M18 CNP of RM407.5m came in within expectations, making up 75%/70% of our/consensus full-year estimates. 9M18 property sales of RM1.6b beat our/management’s full- year sales target of RM1.4b/RM1.3b. No dividend declared, as expected. Raised sales target from RM1.4b to RM1.8b but make no changes to our FY18-19E CNPs. Downgrade to MP with a lower SoP-driven TP of RM1.50 (previously, OP; TP: RM1.55).

Within expectations. 9M18 CNP of RM407.5m came in within expectation, making up 75%/70% of our/consensus full-year estimates. As for property sales, they raked in RM1.6b worth of sales in 9M18 beating our and managements full year target of RM1.4b and RM1.3b, respectively. The spectacular property sales are mainly from its overseas projects of which China and Singapore made up c.63% of the RM1.6b sales. No dividends declared, as expected.

Results highlight. 9M18 CNP grew marginally by 2%, YoY underpinned by: (i) its construction, property investment, and trading & manufacturing segments, which registered growth in pre-tax profits ranging from 16% to 28%, on revenue growth of 9-30%, (ii) lower net financing cost (-25%), (iii) decline in minority interest contribution (- 25%) as most of its on-going projects are under group level, and (iv) lower effective tax rate of 13% ( 15% in 9M17) which further cushioned the decline in pre-tax profits from its development division (-18%). QoQ, 3Q18 CNP grew 4% on the back of revenue growth of 12%, attributable to the sharp growth in development revenue (+120%) due to the handing over of Sunway GEOSense.

Outlook. Given the encouraging sales, management revised their property launches higher to RM2.1b from their initial target of RM2.0b. The latest launch is Sunway Velocity 2 (GDV: RM320.m) with the construction contract recently awarded to SUNCON. To recap, its Singapore project, i.e. Rivercove, received full take-up upon its launch in April 2018, while for its local projects, i.e. Geolake and Citrine Lakehome, sales and bookings are currently recorded at 60-80%. Unbilled sales of RM2.1b with 1-year visibility and a vigorous outstanding order-book of c.RM5.6b provide 2-3 years’ visibility.

Earnings maintained. Post results, we make no changes to our FY18- 19E earnings, albeit raising our FY18E sales target to RM1.8b as we factor in higher sales from China and Singapore. Note that SUNWAY can only recognise billings from China and Singapore upon completion in the next 2-3 years due to the adoption of MFRS15.

Downgrade to MP, with a lower TP of RM1.50 (from RM1.55), after we factor in the recent downgrade in SUNCON’s TP to RM1.30 (from RM1.65). 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) 11.0x FY19E PER to its construction division, highest multiple ascribed for the construction sector. However, we do not think the strong sales performance can be replicated next year. Hence, we believe our downgrade to MP is warranted.

Risks to our call include: Higher-than-expected property sales and construction replenishment, lower-than-expected administrative costs, positive real estate policies, and less stringent lending environment.

Source: Kenanga Research - 22 Nov 2018