Sunway Bhd (July 15, RM3.50)
Maintain buy with an unchanged fair value of RM3.74: We maintain a “buy” on Sunway, with an unchanged fair value of RM3.74 per share based on a 20% discount to the sum-of parts value of RM4.65 per share.
Sunway is facing headwinds in its property development division, with a likely decline in sales for financial year 2015 (forecast) (FY15F) versus FY14’s RM1.7 billion (effective: RM1.3 billion) and its target of RM1.7 billion (effective: RM1.2 billion) for FY15F.
For the first half of FY15 (1HFY15), it posted RM500 million sales and targets the same for 2HFY15. We believe any blip in property revenue will not significantly hurt its long-term prospects, with unbilled sales at RM2.5 billion (effective: RM1.8 billion) 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 on July 28. Sunway will hold at least 51% of SCG. We recap SCG’s prospects.
SCG is a reputable, fully-integrated construction group. The recent over-subscription of its institutional offer for sale by 4.6 times reflects market demand for a pure-play construction group. Based on our FY15F profit after tax (PAT) projection and at a price-earnings (PE) ratio of 13 times, SCG is valued at RM1.17 per share — in line with the initial public offering price of RM1.20 per share. Construction stocks are currently trading at valuations of 12 times to 17 times PE multiples.
SCG can count on RM500 million to RM800 million worth of jobs annually, a robust domestic construction sector and HDB public housing developments in Singapore, which benefit its precast concrete division that garners margins of 15% to 20%. While it appears to be the dark horse to secure the project delivery partner role for the RM9 billion Klang Valley Light Railway Transit Line 3, we believe it stands an equal chance to secure the subcontract jobs thereof. It is also poised to secure substantial building jobs in Putrajaya. We are assuming an annual order book renewal of RM1.8 billion versus SCG’s target of RM2 billion. As at end-March 2015, SCG’s outstanding order book stood at RM2.76 billion to 1.5 times FY14’s revenue of RM1.9 billion. We project FY15 to FY17 PAT at RM117 million to RM137 million.
SCG will pay out at least 35% of profits, a yield of about 2.6% for FY15.
We maintain “buy” for long-term exposure to Iskandar Malaysia. Sunway is paying out a special dividend of 25 sen to 28 sen per share — translating into a yield of 7% to 8%, apart from an expected regular dividend of 10 sen per share. — AmResearch, July 15
This article first appeared in The Edge Financial Daily, on July 16, 2015.