Sunway’s other divisions will cushion impact of soft property market

Sunway Bhd (Aug 24, RM3.36)

Maintain buy with an unchanged fair value of RM3.74: Our fair value is based on a 20% discount to the sum-of-parts value of RM4.65 per share. Sunway’s listed subsidiary Sunway Construction Group Bhd (SunCon) posted a second quarter ended June 30, 2015  (2QFY15) core net profit of RM41.6 million (+21% quarter-on-quarter), bringing the first half (1HFY15) core earnings to RM76 million — beating expectations.

The 1HFY15 core net profit represents 65% and 58% of our and consensus estimates. The operating result was beyond expectations, with estimated earnings before interest and taxes at 76% of our full-year forecast.

As at June 30, the outstanding order book amounted to RM2.69 billion (versus RM2.76 billion at end-March 2015). SunCon has secured RM520 million worth of new jobs so far this year, versus our assumption of RM1.8 billion. SunCon targets to achieve new orders totalling RM2 billion annually. 

Backed by parent Sunway, SunCon can count on RM500 million to RM800 million worth of jobs annually.

As at end-June 2015, SunCon’s outstanding order book accounted for 1.4 times FY14’s revenue of RM1.9 billion. We project SunCon’s FY15 to FY17F (forecast) profit after tax at RM117 million to RM137 million. We maintain our numbers for now, pending Sunway’s result next week.

SunCon’s better-than-expected numbers would help mitigate any decline in property sales. Sunway is facing headwinds in its property development division. For 1HFY15, it registered RM500 million worth of property sales.  Pursuant to the listing of SunCon, Sunway is set to pay out 25 sen to 28 sen per share in a special dividend, translating into a yield of 7% to 8%, apart from an expected regular dividend of 10 sen per share.

We expect Sunway to pay out the dividend by the end of next month. We believe Sunway’s long-term prospects are intact, notwithstanding the current blip in the property market, while its other divisions, including property investments, will cushion the impact of the soft property market. Apart from the anticipated special dividend payout, we maintain “buy” for continued exposure to the southern economic development corridor, specifically in Sunway Iskandar. — AmResearch, Aug 24

This article first appeared in the digitaledge DAILY on Aug 25, 2015. Subscribe here.