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

Stock Name: SUNWAY
Company Name: SUNWAY BERHAD

Research House: AMMB

Price Call: HOLD

Target Price: 2.85

We reaffirm our HOLD rating on Sunway Bhd with our  fair value raised to RM2.85/share based on a25% discount to our revised SOP of RM3.80/share, as we roll forward ourvaluation to FY12F and include its Iskandar project.

Sunway's 4QFY11 earnings came in at RM124mil, thus bringingFY11 net profit to RM370mil. However, stripping exceptional items (fair valuegain from investment properties & associate) amounting to RM44mil, coreearnings came in at RM326mil. This was in line with our estimate but came in slightlyabove street's estimates (+2%).

There is no YoY comparison given that Sunway was listed in August2011. 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, havingseen its operating profit growing by 7x to RM64mil. This was driven by strongprogress billings at key developments such as Sunway Nexis, La Costa, Vivaldiand 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 duringthe quarter due to a one-off provision of RM23mil made for impairment lossesfor its 46%-associate in China. Sunway is looking to exit the business althoughwe are not sure of the timeline at this juncture. Operating margins nonethelessdoubled to 8% arising from its pre-cast jobs in Singapore.

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

The group is currently sitting on a healthy constructionorder book and property unbilled sales of RM2.8bil and RM2.2bil, respectively.This should provide earnings growth of 10%-22% to RM358mil to RM438mil forFY12F and FY13F, respectively. We introduce FY14F earnings at RM412mil.  That aside, the advantage of Sunway'sintegrated business model is obvious whereby it is able to recycle its capitalvia the monetisation of the investment properties. The associate stake inSunway 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 completionand the maturity of its assets, e.g. Sunway Giza, VeloCity mall and SunwayPyramid 3, the unlocking of the assets may not materialise so soon. As such, webelieve there is limited upside to the stock.  

Source: AmeSecurities