Sunway Holdings (OSK Research) buy; target price RM2.72

Sunway has met 67% of our replenishment target YTD and we expect more contract wins by year-end. These include private condos, Legoland, Sarawak road packages,
Arzanah Phase 2 and SunCity projects. We have imputed the contributions from its recent property ventures in Singapore and Sri Lanka, which conservatively increases
our FY11-12 earnings by 1%-7%. Its 3Q results, to be released next Tuesday, should meet our projections. Still our top pick, with a higher TP of RM2.72.

More contracts to come. Sunway has secured RM672m worth of jobs YTD vs our FY10 assumption of RM1bn. We expect Sunway to announce more contract wins by year-end to
close in on our target. Sunway has tendered for some private sector jobs (condos and commercial blocks) and is also eyeing the Legoland Theme Park (RM700m), which we think it has a decent chance of winning given its track record with Sunway Lagoon and Tambun Lost World.

Sunway Holdings
Positive Prospects Intact

Sunway is also bidding for road packages (RM500m) in Sarawak under SCORE. Overseas, we expect tenders for Arzanah Phase 2 to be called next year and Sunway also stands a good chance given its experience with Phase 1 (53% complete).

Jobs from sister company. With the cash freed up from its REIT, we believe that SunCity (NR) can now undertake more developments. The company has been awarded RM968m
worth of contracts from its sister company, SunCity, over the past 5 years. We understand that SunCity has another RM1bn-1.5bn worth of jobs to be tendered out within the next year.

These include:
(i) Sunway office tower,
(ii) Monash Uni extension,
(iii) Sunway Medical Centre extension, and
(iv) an office tower in KL.

Singapore developments. All of Sunway’s property ventures in Singapore are carried out via a 30% JV with Hoi Hup Group. Launches at Boon Keng and Toa Payoh are now 95-
100% sold. Last week, it launched Vacanza in Jln Senang (SGD470m GDV), which has achieved a take up rate of 35% since. Its latest development is a low-rise condo in Miltonia
Close, Yishun.

The SGD370m GDV development comprises 17 blocks of 5 storey condos and overlooks the Orchid Country Club golf course. More launches are slated for 2H2011, and we believe sales should be promising given the success of its past developments.

Sri Lanka is the next frontier. The 65:35 Sunway-Dasa Group JV will be embarking on a mixed development in Colombo, Sri Lanka comprising 70 commercial and 180 residential units with a GDV of USD250m.

Management expects the launch to take place in 2Q2011 and is guiding for PBT margins at a lucrative 20%. The group will enjoy a 5-year tax holiday once the project is completed in 2014. We are positive on its maiden Sri Lankan venture as the country’s recent political stability has spurred property prices.



VALUATION & RECOMMENDATION

Results to meet expectations. Sunway will announce its 3QFY10 results next Tuesday. We expect its core earnings to at least meet our full year projection of RM145m on an annualized basis, or even potentially exceed it. We note that consensus earnings momentum has been positive over the past few months. Its net gearing could potentially fall below 50% compared to 55% in 1Q and 60% in 2Q.

BUY, with higher TP of RM2.72. We retain our FY10 earnings but raise that for FY11 by 1.6% and FY12 by 6.7%. The upgrade is the result of incorporating the contribution from its property developments at Yishun, Singapore and Colombo, Sri Lanka. Our assumptions for these developments are conservative, which allows for room to upgrade.

We are rolling over our valuation parameter from mid-CY11 to FY11 at the same 12x multiplier on a partially diluted EPS basis. This raises our TP from RM2.52 to RM2.72. Sunway remains our top sector pick, with a 3-year annual CAGRf of 36.9%. Its FY10-12 forward PER remains undemanding at 6x-9x.