Sunway Bhd (Oct 20, RM2.26)
Maintain buy at RM2.30 with fair value of RM3.31: While investors are generally positive on the company's prospects, the main concern is uncertain macro outlook for the economy and the property sector. Sunway expects the property market to soften over the next six months but it believes that the accommodating interest rate environment and demographic factors will continue to sustain fairly good demand.
With the Sunway City-Sunway Holdings merger completed in late August, Sunway is still in the process of integrating the group's businesses, which it expects to complete by 2012. We gather that there are several projects in the pipeline involving collaboration between its property development and construction divisions. We believe it should reap cost synergies and value add for the propery division.
Based on management's guidance, we are trimming our earnings forecast for FY11 by 4.4%, taking into account the one-off merger cost of about RM20 million and the higher finance cost arising from the RM900 million loan taken to finance the cash portion of the merger. Sunway expects 2HFY11 earnings to be stronger than in 1HFY11, fuelled by higher progress billings from its property development division and higher revenue recognition by its construction division.
We maintain our "buy" recommendation on Sunway. It is our top pick among mid- to big-cap property companies, due to its attractive valuation and relatively defensive earnings from its property investment segment. Adding to the stock's appeal is the strong order book replenishment in its construction division. — OSK Research, Oct 20