Sunway City 1QFY09 : Strong property investment earnings

• Above expectations.
1QFY09 results were above house and market expectations. Annualised net profits came in at 126.5% and 117.1% of house and consensus estimates respectively. No dividends were proposed during the quarter.
• Revenue -21.4% y-o-y, net profit +0.2% y-o-y
The significant drop in revenue was mainly due to a 53.7% y-o-y decline in property development revenue to RM99.5m as construction progress fall behind schedule and property sales slowed. As the effect of higher
construction costs has been adjusted in FY2008, 1QFY09 property development margin recovered to 27.0% from 18.4% in 4QFY08. The higher margin was also partially due to higher margin for on-going projects
such as Palazzio, Villa Manja and Challis Damansara. Despite the drastic drop in topline, bottomline was flat as stronger earnings from property investment offset lower property development earnings. The 130.2% y-o-y increase in property investment EBIT to RM46.5m was mainly due to the opening of Sunway Pyramid New Wing in Oct 2007 which added 800,000 sq ft of net lettable area to the existing 900,000 sq ft.
• Property sales tumbled to RM82m.
Property sales tumbled to RM82m, a 75.7% decline y-o-y from RM338m and a 66.5% decline q-o-q from RM245m. New launches took a back seat during the quarter. About 90 out of 228 units of Vivaldi condominiums, which have a total GDV of RM735m, were launched with sales take-up of about 30%. The company’s launch and sales targets of RM1,048m and RM1,032m respectively for FY2009 seems like a tall order at this juncture.
• BUY call reiterated.
We tweak our earnings for FY09 by +4.9% for better than expected property investment earnings. Our BUY call is maintained with unchanged target price of RM3.60 (40% discount to RNAV). Sunway City is our top
pick for the property sector for its resilient property investment earnings as well as undemanding valuation at only 4.7x P/E and 0.4x P/BV.