SUNWAY’s 1HFY23 results met expectations. We expect its earnings to gather momentum in 2H underpinned by strong property profits (particularly, lumpy ones from Singapore), acceleration in construction work progress, and its expanding healthcare unit. We maintain our forecasts but raise our SoP-TP by 6% to RM2.27 (from RM2.15). Maintain OUTPERFORM.

Within expectations. SUNWAY’s 1HFY23 core net profit of RM291.6m made up 40% of our full-year forecast and 42% of consensus full-year estimates. We deem this to be broadly within expectations as we anticipate lumpier earnings contributions from the group’s Singapore private condominium projects in which profits may only be recognised upon completion. This is anticipated to occur in 4QFY23.

YoY, its 1HFY23 revenue grew by 14% which was mainly due to higher contributions from its business segments. The group’s property development and construction segments gained from higher completion and progress billing of ongoing projects while its property investment arm benefited from higher consumer spending in its leisure and hospitality operations. Although operating expenses were pressured by higher utility expenses and higher labour costs incurred due to the government's minimum wage policy implementation, operating margin was relatively stable at 9.3% (-0.1ppt). Collectively, with slower property joint venture contributions and a higher effective tax exposure, SUNWAY’s 1HFY23 core net profit was relatively flat at RM291.6m (+2.8%).

Outlook. SUNWAY’s property development segment focuses on launches in more strategic and matured areas to minimise inventory build-ups. As of 2QFY23, its unbilled sales of RM4.86b is expected to flow through meaningfully as construction works are expected to be unhindered. Meanwhile, its construction division is poised to gain from the roll-out of the MRT3 lines, several flood mitigation projects as well as the RTS project. Its current outstanding orderbook sits at RM5.8b. On other areas, SUNWAY is also focusing on its healthcare segment to continue as one of the group’s main growth drivers as its three hospitals continued to demonstrate robust growth. The group foresees potential earnings booster for its leisure, hospitality, and healthcare sectors in the second half of this year, as international arrivals are expected to surge, benefitting the inbound leisure and medical tourism sectors.

Forecast. Post results, we maintain our FY23F earnings and introduce our FY24F earnings.

Maintain OUTPERFORM with a higher SoP-driven TP of RM2.27 (from RM2.15). While our earnings are unchanged, we opt to reduce our discount to RNAV for SUNWAY to 55% (from 65%) as we reckon sentiment for the group’s property development segment may pick up from higher interest in the space thanks to ongoing infrastructure projects. We continue to like SUNWAY for: (i) its healthy pipeline of medical centres located within brownfield townships, (ii) quick turnaround model for its property development arm, and (iii) a diversified range of investment assets which provides stable earnings base. We opine that its strong brand equity could also enable demand for the group’s products and services to be sustained. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) a prolonged slowdown in the property, hospitality and MICE sectors, (ii) rising mortgage rates eroding affordability, and (iii) changes to urban development policies in the Klang Valley.

Source: Kenanga Research - 25 Aug 2023