Sunway - Clear earnings visibility 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.

- Sunway reported a strong sequential growth in core earnings (21% QoQ) to RM114mil in 4QFY12, on the back of a 38% growth in turnover.

- This brings its FY12 core earnings to RM351mil, which is broadly in-line with our and street’s estimates, coming in at +2% and 4% higher, respectively.

- The group declared a first and final dividend of 6 sen/share, which translates into a payout ratio of about 22% – just a tad higher than our assumption of 20%.

- As expected, the property division, i.e. both development & investment, was the key driver to earnings, contributing 64% to group’s operating profit.

- The bulk of the development’s revenue was driven by progress billings from Sunway Nexis, Velocity & South Quay. Meanwhile Singapore projects contributed to strong EBIT margins.

- Meanwhile, the construction unit was affected mostly by one-off provisions for indirect taxes in India amounting to RM7.7mil and bonus provisions. However, tail-end contributions from Rihan Heights more than compensated for the provisions.

- Going forward, Sunway’s earnings would be driven by a strong outstanding order book of RM3.2bil (2.5x FY12 construction revenue) and property unbilled sales of RM2.4bil (2.6x property development turnover), providing solid earnings visibility in the medium term.

- From what we gather, the group plans to launch about RM1.5bil for FY13F with a new sales target of RM1.3bil. This appears conservative compared to other property players.

- From a valuation standpoint, Sunway Bhd appears cheap, currently trading at an FY13F PE of 8x supported by clear earnings visibility in the near- to medium-term.

- While the stock continues to trade at a cheap PE multiple (8x FY13F earnings), we expect its shares to trade sideways in the near term due to lack of appetite for property and construction counters amid election risks.

Source: AmeSecurities