Sunway Holdings (Maybank IB Research) maintain buy; target price RM2.60

Sunway Holdings
Unexpected one-offs

Maintain Buy. RM163m 2010 reported net profit (+114% YoY) was dragged down by c.RM30m negative one-offs at the associates level in the 4Q. Excluding this and other one-offs in the first nine months, core net profit was RM160m, within our RM162m forecast. Our fair value is RM2.85 on 11x 2011 PER. Its merger with Sunway City, at a RM2.60 offer price for Sunway, is expected to complete in July. Shareholders will be able to ride on the stronger upside potential of the merged entity. The stock now offers a high 21% upside to the implied offer price.

4Q10 reported earnings dragged down. RM26m 4Q net profit (-47% QoQ) included c.RM30m of losses at the associates relating to:

(i) reversal of profits previously recognised for overseas construction contracts, and
(ii) realisation of loss from the sale of Perak-Hanjoong by Gopeng. Core net profit was RM53m (+40% YoY). Group EBIT meanwhile was down 29% QoQ mainly due to a RM10m loss at the building materials business. Lower profits from construction (-RM17m) were off-set by higher profits from property development (+RM16m).

2010 core profit more than doubled. The one-offs comprised:

(i) gain from FRS139 adoption (RM14.5m),
(ii) gain from sale of Hanoi Hotel (RM13.4m),
(iii) gain on derivatives (RM14.6m), which off-set
(iv) impairment loss on non-core assets (RM9.5m), and
(v) RM30m losses at the associates in 4Q. 2010 core net profit rose 110% YoY on stronger contributions from construction, property development and trading, while building materials and quarry earnings remained weak. Construction earnings (including associates and JVs) rose 62% while property earnings (including Singapore associates) jumped 4.7x. Trading earnings rose 60% YoY on stronger volume sales and margins.

Starting 2011 on good footing. Outstanding construction order book stands at RM2.4b (54% domestic, 46% overseas jobs) with RM0.9m jobs secured in 2010. The tender book stands at RM16b. Property, with unbilled sales of RM470m, targets RM1.5b launches in 2011. Property earnings will be supported by the 3rd project in Singapore, Vacanza @ East (SGD470m GDV), launched on 26 Sept 2010 with 43% sold. There is no change to our 2011-12 earnings estimates.