SUNWAY’s 9MFY23 core net profit (+13% YoY) missed expectations as lumpy recognitions from the completion of its Singapore-based projects are unlikely to materialise in 4QFY23. That said, this will translate to an enlarged 1QFY24. As such, our FY23F/FY24F forecasts are adjusted by -15%/+14%. We remain confident on its other key sectors driven by steady operating conditions supported by its solid brand equity. Maintain OUTPERFORM and SoP-TP of RM2.27. SUNWAY is one of our 4QCY23 Top Picks.

Below expectations. SUNWAY’s 9MFY23 core net profit of RM420.5m was below expectations, making up 58% of our full-year forecast and 63% of consensus full-year estimate. We were awaiting a lumpy profit recognition from the completion of several high-value private condominium projects in Singapore by 4QFY23, which has been delayed to 1QFY24. The expected profit contributions from here would have been c.RM90m.

YoY, 9MFY23 revenue rose by 17% on the back of better performance across all key business segments. Notably, its lion’s share property development (+27%) and construction (+17%) divisions benefited from higher completion rates and progress billings. Meanwhile, the group’s property investment segment (+40%) gained from greater spending towards its leisure and hospitality offerings. That said, operating profit only grew by 4% as margins were pressed by an overall higher cost environment (8.7%,-1.1ppt), likely dragged by wage hikes. While the group also sustained higher interest costs due to interest rate increases, joint venture performances improved thanks to lumpier property-related profit recognitions (albeit not in its entirety). All in, core net profit came in at RM420.5m (+13%) after accounting for preferential distributions.

Outlook. Overall, we anticipate SUNWAY to deliver sustained performances across the board. Its property development arm will likely be supported by strategic launches in matured townships while building up on existing ones. We also anticipate its Singapore projects to contribute well into FY24 with several key projects due for completion, making up more than half of its RM4.6b unbilled sales in 3QFY23. Its outstanding construction orderbook sits at RM5.8b and may be kept busier by more infrastructure projects going forward. While some may tout on inflationary pressures affecting consumer spending, we believe the group’s diversified property investment portfolio will keep contributions steady, with a weakening MYR possibly able to draw tourists. On its healthcare joint venture, we expect results to see an expansion as more hospitals are due to open in the next two years.

Forecast. Post results, we slash our FY23F earnings by 15% on the back of the delayed profit recognition for a Singaporean property development. However, as profit recognition spills over to FY24, we raise the earnings forecast by 14%.

Maintain OUTPERFORM and SoP-driven TP of RM2.27. 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. SUNWAY is one of our 4QCY23 Top Picks.

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 - 23 Nov 2023