Sunway - Clear earnings outlook but lacks catalysts HOLD

- We reiterate our HOLD recommendation on Sunway Bhd (Sunway), with our fair value kept at RM2.60/share – based on a 25% discount to our sum-of-parts value of RM3.50/share. This follows a company visit.

- The visit has not changed our view of the company. While there is deep value and clear earnings visibility – (1) currently trading at 8x FY13F earnings and attractive 35% discount to its sum-of-parts value, (2) strong unbilled sales and construction order book of close to RM6bil – the company lacks re-rating catalysts in the near to medium term.

- The following are the key take-aways from the meeting: 

- (1) Sunway’s recent launches have been well-received with 80% bookings for retail shops (31 units priced at RM5milRM7mil) and office suites (265 units @RM700psf) at Sunway Geo and Sunway Velocity, respectively, although response to the office suites at Sunway Geo is slightly slow with a take-up of only 45%.

- We therefore expect the group to exceed its revised sales target of RM1bil (or RM800mil effective) given that it had already achieved RM674mil in sales as of June 2012. The group is currently in the midst of converting the recent bookings into actual sales.

- (2) For 2HFY12, the group plans to launch residential properties with a combined GDV of RM340mil at (1) Sunway Montana, (2) Sunway Eastwood, (3) Sunway Suria Alam and (4) Sunway Cassia. We believe take-up should be quite decent despite the slightly steep pricing, given the location and concept of the products. 

- (3) Current strong order book in hand of RM3.6bil (x FY11 construction revenue) will keep the company busy in the medium term. Having already exceeded its order book renewal target, the group is looking at achieving RM2bil new jobs this year – expecting a decent RM300milRM400mil worth of jobs by the end of this year. 

- Despite Sunway’s 1HFY12 earnings coming below expectations, we are not changing our estimates. Stronger progress billings for its projects will drive a recovery in the coming quarters. Sunway’s net gearing is currently at 54%.

- From a valuation standpoint, Sunway Bhd appears cheap, currently trading at FY13F PE of 8x supported by clear earnings visibility in the near to medium term. But we do not see any strong valuation gap up as we do not expect any re-rating for the counter.

Source: Kenanga