Kenanga Research & Investment

Sunway - Priced to Perfection

Publish date: Thu, 22 Feb 2024, 11:38 AM

SUNWAY’s FY23 results beat our forecast but met market expectations. Its core net profit rose 19% YoY on stronger performances across the board. Its fundamentals are sound backed by a diverse portfolio of growing businesses but we believe have been priced to perfection. We tweak our FY24F earnings up by 2%, raise our TP by 11% to RM2.51 (from RM2.27) but maintain our UNDERPERFORM call.

Above expectations. SUNWAY’s FY23 core net profit of RM686.4m beat our forecast by 12% but only met market expectations. The variance against our forecast primarily stemmed from stronger-than-anticipated performances in property developmentand property investment segments, as well as contributions from its associated entities.

YoY, its FY23 revenue rose 18% from enhanced performance across all primary business segments. Noteworthy are the construction (+32%) and property development (+22%) divisions which saw elevated progress billings and increased property sales. Additionally, the group's property investment segment (+30%) benefited from amplified spending in leisure and hospitality offerings. Meanwhile, operating profit only grew by 16%, as margins were squeezed by a heightened cost environment (10.8%, - 0.2ppt), likely influenced by increased wages and utilities. While the group also sustained higher interest costs due to interest rate increases, joint venture and associate company performances improved thanks to lumpy property-related profit recognitions. All in, core net profit came in at RM686.4m (+19%) after accounting for ICPS payments.

QoQ, its 4QFY23 revenue surged by 21%, primarily driven by increased contributions from nearly all business segments. Operating profit saw a remarkable 145% rise, primarily attributed to a substantial increase in other operating income (+1,167%). Additionally, interest expenses decreased by 24% which led to 4QFY23 core net profit of RM265.9m (+71%).

Outlook. We anticipate SUNWAY to maintain strong performance across its diverse portfolio. Strategic launching of projects in established townships and continued development in existing ones should bolster the property development arm. Despite concerns about inflationary pressures potentially impacting consumer spending, the group's diversified property investment portfolio is poised to maintain stability, with the possibility of a weakening MYR attracting tourists. Additionally, we foresee expansion in the results of its healthcare joint venture, particularly with the forthcoming opening of several new hospitals over the next two years and medical tourism sector.

Forecasts. Post results, we slightly raise our FY24F earnings by 2% which is mainly fuelled by stable property investment performances but with some possible easing in the property development arm. That said, its 26% EPS growth from FY23 is mostly attributable to better associate returns, namely from the handover of a Singaporean executive condominium project which will bring about lumpy profit contributions. Meanwhile, we introduce our FY25F numbers.

Valuations. We raise our SoP-TP to RM2.51 (from RM2.27) following updates to our segment inputs with FY23A numbers. We applied a 55% discount to RNAV for SUNWAY’s property development segment (in line with industry peers) as we reckon sentiment may pick up in the sector from higher interest in the space thanks to ongoing infrastructure projects. Besides this, the group’s property development and healthcare segments remain as major contributors to SUNWAY’s overall valuations. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Investment case. SUNWAY could be favoured 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 sustained demand for the group’s products and services. That said, valuation for the stock has become rich following the recent run-up in its share price. Maintain UNDERPERFORM.

Risks to our call include: (i) strong improvements in the property, hospitality, and MICE sectors, (ii) improved mortgage affordability, (iii) changes to urban development policies in the Klang Valley, (iv) stronger demand for industrial products.

Source: Kenanga Research - 22 Feb 2024

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