Given the fast re-rating of many Iskandar-based property stocks, we see further upside in Sunway. We raise our fair value to MYR4.28 (from MYR3.50) and reiterate our Buy rating on Sunway. Sunway not only has cheaper valuations of 11.5x, but is also a better quality Iskandar play compared to the others. Earnings track record, management capability, and future earnings visibility are simply unbeatable.

-  Why cheaper? Given the fast re-rating of many Iskandar-based property stocks lately, we believe Sunway’s valuations should catch up and close the valuations gap. Compared to big-cap UEM Land, and small-cap Crescendo and Daiman’s PE of 25.1x, 10.1x, and 12.8x, Sunway’s FY13 PE is only at 11.5x. Apart from its other construction and trading businesses, Sunway has a sizeable exposure in Iskandar. Land size of over 1,800 acres in Iskandar forms 57% of its total portfolio GDV, and the location of its land is at a strategic location, close to the second link to Singapore. For these big parcels of land, Sunway’s land cost of MYR27.23 psf for Medini and MYR12.69 psf is considered attractive given today’s property pricing in Iskandar.

-  Why better quality? In our view, compared to its peers, Sunway’s earnings quality, management track record and future earnings visibility undoubtedly stand out. The company has achieved an all-time high construction orderbook of MYR4.4bn and MYR2.3bn unbilled sales. Its 34%-owned Sunway REIT will see a step-up in earnings later next year, as the turnaround of Sunway Putra Place will start to bear fruit. Recently, Sunway appointed Sarena Cheah and Mr Ong Pang Yen (Head of International Property Development) as the joint MDs of the property development division.

-  Maintain Buy. Considering the fast re-rating in some smaller cap Johor property plays; we believe Sunway deserves higher valuations, given its quality. Thus, we lower our discount to RNAV to 20% (from 25%) and increase our PE multiple for the construction division, in line with RHB’s recent upgrade of the construction sector. Fair value is now raised to MYR4.28. This still gives a fairly decent implied FY13f PE of 14.5x. Sunway remains our top pick for the sector.

Source: RHB