Review

• Sunway’s 1Q24 core net profit of RM172.2mn came in within expectations, accounting for 22% of both our and the consensus’ full-year forecasts. 2Q24 results are expected to receive a significant boost from the lumpy recognition of profit from Parc Central Residences, an executive condominium project in Singapore, upon its completion. The accumulated progressive profits for this project amounted to RM120mn as at the end of March 2024.

• YoY: 1Q24 revenue increased by 12% YoY to RM1.4bn driven by stronger performance across all business segments. PBT rose 18% YoY, aligning with the revenue growth. All segments recorded higher PBT except trading and manufacturing and other segments. The property development segment's PBT grew 68% due to higher sales and progress billings from new and ongoing local projects. The healthcare division's performance was also encouraging, with a 28% YoY increase in PBT driven by a 34% increase in licensed bed capacity.

• QoQ: 1Q24 revenue contracted by 24% due to lower contribution from all segments due to seasonality factor. Note that, the fourth quarter is traditionally a stronger quarter for most business segments. However, PBT eased only 3.4% QoQ, largely cushioned by higher associate profits.

• Sunway recorded new sales of RM498mn in 1Q24, up 41% QoQ but down 2% YoY. We consider the sales performance remarkable, especially given that there were no new launches in 1Q. The Klang Valley region contributed 44% of total sales. In Johor, property demand surged, with sales rising to RM148mn, compared to RM28mn in 1Q23 and RM60mn in 4Q23 – see Figure 1.

Impact

• After reviewing our earnings model and incorporating revised earnings for SunCon, we adjust our FY24/25/26 earnings forecasts upwards by 0.7%/4.1%/4.0%, respectively.

Outlook

• Sunway is targeting new sales of RM2.6bn this year (+6% YoY), with 1Q24 sales accounting for 19% of the target. The group plans to launch projects worth RM1.4bn in 2H, primarily in Malaysia, comprising 83% of the total launches. With unbilled sales of RM4.2bn and an outstanding construction order book of RM4.1bn (external jobs only), Sunway has earnings visibility for the next 3-4 years.

• SunCon has significantly expanded its involvement in Advanced Technology Facilities projects. Securing three new data centre projects in the Klang Valley in 1Q24, it continues to actively pursue further opportunities in this sector. The outlook for major infrastructure projects is increasingly favourable, underscored by recent tenders for the expansion of the Penang Airport and the proposed development of the Bayan Lepas Light Rapid Transit projects.

• In our view, Sunway is well-positioned to benefit from the strengthening domestic economy. We believe the retail, leisure, hotel, and healthcare segments are expected to experience positive impacts from this economic growth. Notably, the healthcare sector, a key growth driver for Sunway, is expected to perform strongly, supported by the expansion of existing capacity and the upcoming launch of SMC Damansara and SMC Ipoh in 4Q24 and 1Q25, respectively, adding 600 beds to the current 1,158 licensed beds.

• Looking ahead, we expect the completion of the Rapid Transit System (RTS) rail link and the establishment of the Johor-Singapore Special Economic Zone (JS-SEZ) to bode positively for Sunway City Iskandar Puteri. The JS-SEZ is gaining traction, with recent advancements like the use of QR codes for border clearance enhancing convenience for travellers between Singapore and Johor. The positive sentiment is clearly reflected in the strong sales performance of Sunway Aviana, a landed development within Sunway City Iskandar Puteri. Since their official launches in October 2023, Phase 1 and Phase 2 have achieved remarkable take-up rates of 100% and 91%, respectively. Building on this momentum, Phase 3, launched in April 2024, has already seen an impressive take-up rate of 86%.

Valuation

• We arrive at a new SOP-derived TP of RM4.12/share (previously RM3.29/share). This incorporates an increased P/E multiple of 20x (previously 16x) for the property development and property investment segments (excluding Sunway REIT) to reflect the upbeat property sector sentiment. We value SunCon and Sunway REIT based on our latest TPs. As for the healthcare division, we peg the valuation at a 24x EV/EBITDA (previously 20x), to account for its strong earnings growth trajectory ahead driven by expansion plans. Meanwhile, the trading & manufacturing and quarry segments are valued at 12x CY25 earnings. Maintain Buy.

• The potential inclusion of Sunway as a new constituent of the FBMKLCI could serve as an added catalyst. Currently ranked 23rd by full market capitalisation, Sunway is eligible for inclusion in the benchmark index and is expected to replace the lowest-ranked constituent stock, AMMB, based on the latest market capitalisation data.

Source: TA Research - 23 May 2024