Sunway Holdings (ECM Libra Research) buy; target price RM2.00

1QFY10 : Strong start to the year

• Solid results
Sunway reported a 1QFY10 net profit of RM39.9m, inclusive of a derivative gain of RM4.6m arising from the adoption of FRS139. Adjusted net profit of RM35.0m is above expectations, making up 29.8% of house estimates and 30% of consensus estimates. No dividends were declared.

• Revenue +31.5% y-o-y, adjusted net profit +127.8% y-o-y
The group’s revenue and bottom line growth were largely attributed to better progress and commencement of new projects such as the Putrajaya projects in the construction segment, and Rydgeway Melawati project in the property segment. The stellar y-o-y improvement was driven by higher margins across all segments with the exception of the quarry division.

The construction segment registered an EBIT margin of 9.4% in 1QFY10, as opposed to 1.6% in 1QCY09 from precast supply project in Singapore and cost savings from local projects which are nearing completion. Meanwhile, the property segment reversed a loss position in 1QCY09 and registered a 14.8% EBIT margin in the current year, as the public housing project in Boon Keng gains momentum, coupled with further contributions from the Rydgeway Melawati project.

• Earnings growth momentum intact
As improved margin in the construction segment was partly due to cost savings from projects nearing completion, we do not believe such margin can be repeated in the coming quarters. However, the property segment is targeting launches in FY2010 amounting to RM750m and will soon see earnings contribution from their biggest property project in terms of GDV, the public housing project at Toa Payoh, Singapore.

Construction order book currently stands at RM2.8bn while unbilled sales amounts to RM515m (see Figures 3 – 4). Although results came in above expectations with prospect of further earnings upgrade, we make no changes to our estimates for now other than some housekeeping changes until we see further traction in the 2QFY10.

• Reiterate BUY, TP: RM2.00
We reiterate our Buy call with a target price of RM2.00 based on 10x PE on FY2010 EPS. We like Sunway for its (1) strong earnings growth of 46.4% in FY10, (2) undemanding forward PE valuation of 6.6x, (3) more land bank acquisition in the pipeline, and (4) strength in securing overseas contracts. This is further supported by our sum of parts valuation
of RM2.74 (see Figure 2).