Friday, May 28, 2010

Sunway Holdings (Current Price: RM1.45; Target Price: RM2.00): High earnings growth, low PE, declining gearing and strong orderbook

Sunway Holdings Bhd is a conglomerate with most of its operations concentrated in construction. It is also involved in other business segments such as property development, quarry, trading (Hoses, fittings, heavy equipment and heavy equipment parts) and building materials (pipes, pavers and wall panels).

The company had just released its 1Q 10 results and earnings were fantastic, the highest ever recorded for the company. Net profit stood at RM39.9 mil (excluding derivative gains will make it approx. RM35 mil). Consensus estimates its earnings will touch RM120 mil and RM160 mil in 2010 & 2011 respectively. EPS for 2010 and 2011 will be 20 sen and 26 sen respectively. Therefore PE for 2010 and 2011 earnings is very low at 7.3x and 5.6x respectively, as compared to its peers i.e. Mudajaya, IJM, WCT and Gamuda which have an average PE of 14-15x. By attaching PE of 10x to its earnings, target price should reach RM2.00, representing 43% upside.

Cleaning up and get moving:
The company has been laden with losses from its venture into SunInfra in 2006-07. In 2008, it finally disposed of its stake in SunInfra, which would not drag the company earnings anymore. In addition, it divested non-core assets such as Plaza Masalam and Sunway Hanoi Hotel totaling RM133 mil and is planning divestments including Wisma Mas and Subang Square totaling RM76 mil. Its warrant conversion could potentially raise another RM320 mil (246 million warrants @ exercise price of RM1.30). Nonetheless, I think warrant holders will wait until the share price have moved up substantially to convert as current price is too near the exercise price. All the above are aimed at reducing its gearing. Consequently, Sunway's net gearing was pared down substantially from 112% in 2007 to 58% currently through its divestments and corporate exercise. It is targeting net gearing of below 50% which could be achieved easily from its earnings by FY2011.

Strong orderbook:
Sunway has approximately RM2.8bil worth of outstanding orderbook which could last them for more than 2 years. The projects and their respective remaining orderbook are as follow:

Local Projects:
1. Putrajaya (2 Government Office Buildings): RM297 mil
2. SKVE Highway: RM34 mil
3. Precinct 1, Putrajaya (Hotel & Office): RM144 mil
4. Impiana Hotel: RM88 mil
5. Sunway Office Tower: RM88 mil
6. Others: RM149 mil

1. India Highway: RM48 mil
2. Abu Dhabi Al-Reem Island: RM91 mil
3. Abu Dhabi Rihan Heights: RM1,490 mil
4. Singapore Precast: RM354 mil

It has tendered for a massive RM16 bil worth of projects with expected success rate of 10-15%. Annual replenishment of orderbook could reach RM1.5 bil. Among the project bids include LCCT, Putrajaya projects, Suncity projects, Indian roads, Legoland (Iskandar Malaysia) and Abu Dhabi projects of which it stands a high chance of winning owing to its construction experience in all these areas.

Other divisions to provide support:
Quarry, trading and property earnings have been providing consistent support to its earnings. Property launches are expected to be around RM800mil this year and it has about RM1.9 bil worth of outstanding GDV.

In conclusion, owing to its higher profitability (Its earnings have never been this high historically), healthier balance sheet, strong orderbook and strong prospects in contract flows from a variety of clients, the company deserves expansion in its PER.

Market Data:
Earnings for 2010 and 2011: RM120 mil and RM160 mil
PER for 2010 & 2011: 7.3x and 5.6x
Shares issued: 601.8 million
Mkt Cap: RM872.55 million
Net Gearing: 58%
P/BV: 1.1x

1. Jeffrey Cheah: 45%

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

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