Sunway - Earnings in line; sitting on a healthy order book and unbilled sales HOLD

We reaffirm our HOLD rating on Sunway Bhd with our  fair value raised to RM2.85/share based on a 25% discount to our revised SOP of RM3.80/share, as we roll forward our valuation to FY12F and include its Iskandar project.

Sunway’s 4QFY11 earnings came in at RM124mil, thus bringing FY11 net profit to RM370mil. However, stripping exceptional items (fair value gain from investment properties & associate) amounting to RM44mil, core earnings came in at RM326mil. This was in line with our estimate but came in slightly above street’s estimates (+2%).

There is no YoY comparison given that Sunway was listed in August 2011. Core earnings grew by a decent 6% QoQ  to RM99.3mil on the back of a 4% jump in revenue. 

Property development was the star performer in 4QFY11, having seen its operating profit growing by 7x to RM64mil. This was driven by strong progress billings at key developments such as Sunway Nexis, La Costa, Vivaldi and Velocity. The group plans to launch RM2bil worth of properties this year, with target sales of RM1.9bil.

However, its construction unit reported losses of RM5mil during the quarter due to a one-off provision of RM23mil made for impairment losses for its 46%-associate in China. Sunway is looking to exit the business although we are not sure of the timeline at this juncture. Operating margins nonetheless doubled to 8% arising from its pre-cast jobs in Singapore.

Sunway’s annual order book target of RM1.5bil may be achievable given that a third of it is secured by jobs from its property unit. Having said that the group is in the mix for several key infra jobs, including MRT elevated packages and earthworks for KLIFD development. 

The group is currently sitting on a healthy construction order book and property unbilled sales of RM2.8bil and RM2.2bil, respectively. This should provide earnings growth of 10%-22% to RM358mil to RM438mil for FY12F and FY13F, respectively. We introduce FY14F earnings at RM412mil.  That aside, the advantage of Sunway’s integrated business model is obvious whereby it is able to recycle its capital via the monetisation of the investment properties. The associate stake in Sunway REIT provides a ready platform for  this purpose. This is the primary catalyst for any re-rating. 

In any case, given the gestation period between the completion and the maturity of its assets, e.g. Sunway Giza, VeloCity mall and Sunway Pyramid 3, the unlocking of the assets may not materialise so soon. As such, we believe there is limited upside to the stock.  

Source: AmeSecurities