AmWatch - Sunway : Long-term prospects intact amid headwinds, 15 Jul 2015

STOCK FOCUS OF THE DAY

Sunway : Long-term prospects intact amid headwinds   Buy

We maintain BUY on Sunway, with an unchanged fair value of RM3.74/share, based on a 20% discount to the SOP value of RM4.65/share. Sunway is facing headwinds in its property development division, with a likely decline in sales in FY15F vs. FY14’s RM1.7bil (effective: RM1.3bil) and its target of RM1.7bil (effective: RM1.2bil) for FY15F.

For 1HFY15, it posted RM500mil sales and targets the same for 2H. We believe any blip in property revenue will not significantly hurt its long-term prospects, with unbilled sales at RM2.5bil (effective: RM1.8bil) as at end-March while its other divisions will cushion the impact. The construction unit – Sunway Construction Group Bhd (SCG) – will make its debut on the Main Market of Bursa Malaysia Securities on 28 July 2015. The recent oversubscription of its institutional offer for sale by 4.6x reflects market demand for a pure-play construction group. Based on our FY15F PAT projection and at a PE of 13x, SCG is valued at RM1.17/share – in line with the IPO price of RM1.20/share. Construction stocks are currently trading at valuations of 12x-17x PE multiples.

SCG can count on RM500mil-RM800mil worth of jobs annually, a robust domestic construction sector and HDB public housing development in Singapore. We are assuming an annual order book renewal of RM1.8bil vs. SCG’s target of RM2bil. As at end-March 2015, SCG’s outstanding order book stood at RM2.76bil – 1.5x FY14’s revenue of RM1.9bil. We project FY15F-FY17F PAT at RM117-137mil. SCG will pay out at least 35% of profit, a yield of ~2.6% for FY15. Maintain BUY for long-term exposure to Iskandar Malaysia. Sunway is paying out a special dividend of 25 sen-28 sen/share – translating into a yield of 7%-8%, apart from an expected regular dividend of 10 sen/share.

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