Review

• Excluding the fair value gain from revaluation of Sunway REIT properties of RM43.6mn and disposal gain on Sunway University asset of RM37.7mn, Sunway’s 9M19 normalised net profit of RM485.0mn came in at 79% and 78% of ours and consensus’ full-year forecasts respectively.

• However, we deem the results to be above expectations, as we expect the group will sustain the strong 3Q results in 4Q. Note that Sunway’s 9M normalised net profit typically accounted for c.70% of full-year earnings.

• Despite revenue decreasing by 13.4% YoY, Sunway’s 9M19 normalised net profit grew 19.7% YoY to RM485.0mn, mainly due to: 1) better EBIT margin (+2.2 %-pts YoY to 13.4%), 2) higher finance income (+20% YoY), 3) lower finance cost (-10% YoY), and 4) lower effective tax rate.

• QoQ, Sunway’s 3Q normalised net profit grew 11.0% to RM183.4mn on the back of a 13.9% growth in revenue. Stronger sequential results were driven by property development and construction divisions.

• Sunway reported RM325mn sales in 3Q19 (-31%QoQ, -59% YoY), bringing 9M19 sales to RM1.1bn (-35% YoY). Property sales were softer YoY due to absence of new launches in Singapore. Excluding overseas contribution, Sunway’s 9M19 sales increased 67% YoY to RM936mn.

• The group’s 3Q19 unbilled sales inched slightly to RM2.8bn (effective RM2.1bn), from RM2.7bn a quarter ago.

Impact

• To be in line with 9M results, we factor in: 1) lower SunCon contribution – refer SunCon 3Q results, 2) higher blended EBIT margin assumptions by c.1%-pts to 14 - 15%; 3) lower net finance cost and effective tax rate, and 4) recent acquisitions, into our earnings models. Correspondingly, our FY19-21 earnings are revised higher by 4-11%.

Outlook

• Sunway’s recent launches have attracted warm responses, achieving >70% take up for the high-rise projects, whereas the town houses also recorded sales/bookings of 55% - see Figure 1. The group has scaled down the FY19 launch target to RM1.2bn from RM2.0bn previously. The key revision is the delay of private condominiums in Brookvale, Clementi launch (GDV: RM1.0bn) to next year. Nonetheless, the group has decided to roll out Sunway Avila Tower B in December given Tower A, which was launched in May-19, is now 90% sold.

• Despite the revision in launch target, we believe the group is on track to meet our FY19 sales assumptions and management’s sales target of RM1.3bn (maintained) supported by: 1) 9M19 sales of RM1.1bn (82% of target) and 2) RM360mn new launches in 4Q.

• The group’s unbilled sales of RM2.8bn and outstanding construction order book of RM3.5bn (external jobs only) should provide earnings visibility for the next 2-3 years.

Valuation

• Factoring in the change in earnings, we arrive at a new TP of RM1.84 (previous RM1.78), based on target average blended CY20 PE/PB of 14x/0.9x. It has been a busy year for Sunway as it has locked in 5 land deals, expanded its quarry business, opened its new medical centre in Sunway Velocity in September and invested in purpose-built student accommodations in UK. With a potential total return of 8.5%, we maintain our Hold recommendation on Sunway.

Source: TA Research - 22 Nov 2019