Sunway - Property sales target is a challenge HOLD

- We reaffirm our HOLD recommendation on Sunway Bhd (Sunway) with our fair value cut to RM2.70/share (from RM2.85/share previously), assigning a 25% discount to our revised sum-of-parts of RM3.60/share as we assume slower property sales for FY12F and FY13F.

- The key highlight from our meeting is that Sunway has turned more cautious on the property sector. We understand YTD sales have been rather subdued – Sunway managed to record new sales of only RM100mil (up to February) versus about RM200mil achieved in the corresponding period last year. Sales have been largely driven by terraced units in Shah Alam, commercial units at Nexis and Singapore products. 

- It seems that the weak sales were largely due to the 70% LTV ruling introduced to the market in November last year. This is not a surprise as Sunway’s pricing for its products have always been on the high side and 70% of its planned launches are priced at least RM1mil per unit.  Nonetheless, we acknowledge that its developments are mostly located at favourable locations. 

- As a result, the group has deferred its initial 2012 launches to 2Q2012. Among the key launches deferred are the commercial properties in Sunway South Quay – comprising 31 units of 3-storey shop offices priced at RM6mil & above, Sunway Montana in Desa Melawati and commercial properties in Penang. 

- We therefore believe it may be a challenge for Sunway to meet its RM1.9bil sales target this year. We have cut our new property sales assumption by 20%-25% to RM1bilRM1.5bil for FY12F-FY13F. Consequently, we have slashed our earnings by 4%-5% for FY12F-FY13F to RM344.2milRM417mil.

- Having said that, the group is currently sitting on a healthy construction order book and property unbilled sales of RM2.8bil and RM2.2bil, respectively.  

- Additionally, we are quite positive on Sunway’s chances of winning one of the remaining MRT packages, given that it has the cost advantage over its competitors due to its inhouse piling capabilities. We note that piling work accounts for 20%-30% of the elevated package or circa RM200mil-RM300mil. Thus, we do not believe it would be an issue for Sunway to meet its order book renewal target of RM1.5bil.

- Sunway is currently trading at quite a steep discount (30%) to its SOP and one of the cheapest stocks in our conglomerate coverage – trading at CY12F PE of 11x vis-avis its peers of 17x. While the stock looks attractive there are no near term catalysts.

Source: AmeSecurities