INVESTMENT HIGHLIGHTS

• 1HFY18 earnings slightly below expectations

• Higher earnings in 1HFY18

• Strong property sales of RM1.3b in 1HFY18

• Earnings forecast revised downwards

• Maintain Neutral with unchanged TP of RM1.60

1HFY18 earnings slightly below expectations. Sunway Berhad (SUNWAY) 1HFY18 core net income of RM262.2m came in slightly below expectations, making up 43% of our and consensus full year estimates. This was mainly due to lower-than-expected earnings from project in Singapore following adoption of MFRS 15. Under MFRS 15, SUNWAY can only recognise the development profits from Singapore project upon its completion. Dividend of 3.5 sen per share was announced.

Higher earnings in 1HFY18. SUNWAY 2QFY18 core net income increased marginally at +0.7%yoy, bringing cumulative earnings in 1HFY18 to RM262.2m (+6.5%yoy). The growth in 1HFY18 earnings were mainly driven by higher earnings from property investment division. Operating profit of property investment division increased 23.9%yoy, mainly buoyed by higher earnings contribution from Sunway Velocity Mall. Meanwhile, operating profit of property development division fell 18.2%yoy due to lower progress billings from local development projects. Besides, adoption of MFRS 15 had dragged earnings of the property development division as SUNWAY can only recognise the development profits from Rivercove Residences project in Singapore upon its completion.

Strong property sales. SUNWAY recorded strong property sales of RM674m in 2QFY18, bringing total new sales to RM840m in 1HFY18. The strong sales in 1HFY18 were mainly contributed by its Singapore project, which made up 79% of total new sales. Meanwhile, SUNWAY achieved its full year new sales target as its year-to-date new sales reached RM1.3b. Hence, we revise our full year new sales target to RM1.8b. Meanwhile, unbilled sales surged to RM1.5b from RM947m, providing 1.3 years earnings visibility to property development division.

Maintain Neutral with an unchanged TP of RM1.60. We revise downwards our earnings forecast for FY18 and FY19 by -2.7% and -2.8% respectively due to the deferred earnings recognition from Singapore project despite strong sales. Despite the earnings downward revision, our TP is unchanged at RM1.60 as the earnings revision reflects only deferred earnings recognition from Singapore project and it does not affect our Sum-of-Parts valuation. We maintain our Neutral call on SUNWAY due to neutral earnings outlook for property development division.

Source: MIDF Research - 23 Aug 2018