SUNWAY–Fundamental Analysis (7 Dec 2013) - L. C. Chong

Tan KW

Publish date: Sun, 08 Dec 2013, 10:46 AM

Posted by L. C. Chong on December 7, 2013

SUNWAY Analysis – http://lcchong.files.wordpress.com/2013/12/sunway-q3-2013.xlsx

Latest Financial – Q3 2013 Financial Report (29 Nov 2013) http://www.bursamalaysia.com/market/listed-companies/company-announcements/1479809

At the time of writing, I owned shares of SUNWAY.

http://lcchong.wordpress.com/2013/12/07/sunwayfundamental-analysis-7-dec-2013/

Sep-13 Performance

- 9M results - Revenue grew by 20% to RM3.2bn, lifted by strong progress in nearly all divisions except Property Investments. Its huge backlog orders in the property and construction division drove revenue up by 43% and 29% to RM749.9m and RM1.2bn respectively, with property and construction EBIT up by 33% and 35% to RM131.9m and RM58.4m respectively. Contributions from Singapore projects (reported under JCE) also boosted overall earnings growth. The only weakness was the Property Investment and Trading/Manufacturing division which posted slight decline in earnings. Overall, core PATAMI grew by 38% to RM325.5m.

- Quarter review - 3Q revenue climbed by 23% YoY but dipped by 5% QoQ to RM1.1bn. Meanwhile, core PATAMI grew by 32%/12% YoY/QoQ to RM124.4m. Earnings growth was driven mainly by the property division.

- Property - Achieved effective new property sales of RM344m in 3Q (2Q: RM288m, 1Q: RM203m), hence bring YTD sales of RM835m, making up 76% of its RM1.1bn FY13 new sales target. 3Q sales were largely driven by South Quay launches. Singapore Novena (Effective GDV: RM555m) launched in October has achieved a take-up rate of 45%. Hence, Sunway is on track to exceed its new sales target again. Its unbilled property sales stood at RM1.8bn (see Figure #3), translating to 1.9x FY12’s property revenue.

- Construction - Secured RM1.5bn worth of external construction orders, meeting our annual order book replenishment assumption for FY13. External outstanding order book stood at RM3.0bn (see Figure #4), translating to 2.4x FY12’s construction revenue.

Comments

Profitability

	- ROIC and CROIC are below my benchmark. - NPM and FCF/Sales are slightly above my benchmark. - As of now, performance in 2012 better than 2011, but SUNWAY only got 2 years history of data. - Despite the potential headwinds from property tightening measures and slower contract flows, its recapitalised balance sheet and large order book will be able to sustain earnings growth.

Financial Health

	SUNWAY is highly leveraged in expanding its business, but as I know, this is a norm in construction industry. I need to further monitor its Cash Conversion Cycle.

Growth Drivers

	- Substantial exposure in Iskandar at reasonable land cost - A new long-term growth driver from the Sunway Iskandar integrated township project - Established brand name - In Sep 2013, Sunway Bhd’s property ventures in Singapore, which carry an estimated total gross development value (GDV) of S$3.7 billion (RM9.4 billion) - In Sep 2013, Sunway acquired land in Singapore through a joint venture consortium - Total acquisition cost is RM1.13b (RM340m based on Sunway’s 30% effective stake) - Total GDV is RM2.04b ( RM612m based on Sunway’s effective stake) - An outstanding order book of RM4.2bn has further upside from potentially new jobs in 2H13. The RM283m urban wellness centre project won recently marked Sunway's fifth contract in Iskandar, bringing total job wins YTD to RM1.8bn. The group could win 1-2 more jobs in the coming months given the RM500m-800m targeted wins in 2H. Sunway is also a strong contender for new MRT jobs. - In Apr 2013, Sunway announced that it has secured a contract worth RM222mn from Cititower Sdn Bhd (a JV Co between KLCC (Holdings) Sdn Bhd and QD Asia Pacific Ltd) for the construction and completion of pilling and sub-structure works for the proposed mixed commercial development for Lot 185 & Lot 167 (K). This is the second contract awarded by KLCC to Sunway for 2013. To recap, the group clinched a RM304mn contract to build 6 level basement carpark for the proposed mixed commercial development Lot 185, Lot 167 (K) and Lot 176 a month ago. - - On the construction front, Sunway has bagged 1) Legoland Water Park worth RM45mn, 2) Bus Rapid Transit – Sunway Line worth RM452mn, 3) KLCC North East Car park worth RM304mn, and 4) KLCC package 2 worth RM222mn. These jobs have boosted its order book to RM3.4bn (excluding in-house works) – see Table 1. Of this, we expect MRT and LRT works to run in full swing. - With total 1,858 acres of undeveloped landbank within the Iskandar region, Sunway is one of the largest land-owner in Johor. We are positive on Sunway’s land acquisitions spree in the Iskandar region recently given it is poised to be the main growth area for Malaysia. These lands are expected to yield a combined GDV of RM30bn with a development period of over 17 years. Sunway Construction arms will also stand to benefit from these projects as it is likely be awarded civil works packages. - Sunway Bhd will see the book value of its investment properties balloon by about RM1bn after the completion of the shopping mall, hotel and office tower at its integrated mixed development Sunway Velocity along Jalan Cheras. Central region property development division executive director Ong Ghee Bin said the investment cost for phase two, which included a 1.4m sq ft shopping mall, hotel, office tower and corporate office, was RM1.5bn.

Risks/Challenges

	- Competition from other developers within Iskandar's vicinity - Some overseas ventures which are not contributing meaningful earnings - Execution risk; - Regulatory and political risk (both domestic and overseas); - Rising raw material prices; - Unexpected downturn in the construction and property cycle. - slowdown in sales / cut back in launches - Rising NPL ratios and loss of holding power - A/R changes is much higher than revenue changes.

Valuation

	- For SUNWAY, I will look into 3 years horizon. 3-Y DCF valuation suggests that SUNWAY is still under-valued. SUNWAY is still valued at 3.35 even if SUNWAY experiences negative growth in its owner earnings. This is also further supported by Reverse DCF. - Absolute PE also indicates fair value at 3.6. - As for EY%, due to lack of historical data, I won't take EY% fair value into consideration for the time being. May be next financial year. - I think pace of property and construction industry will be slowing down next year. For me, fair value ranging from 3.6-3.9.

Strategy

	- Based on the current chart pattern, I believe that SUNWAY will continue bearish with some technical rebounds. - I will accumulate SUNWAY when there is a bullish reversal pattern.

SUNWAY (5211)

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