12 things I learned from the 2019 Sunway AGM

Established in 1974 and listed on Bursa Malaysia as Sungei Way Holdings Berhad in 1984, Sunway Berhad is widely known as a success story for its transformation from a humble tin mining enterprise to become one of Malaysia’s largest conglomerates with 10 key business divisions that operate across 50 locations worldwide. The group’s core interests are focused on real estate, construction, education, healthcare, retail, and hospitality.

The conglomerate’s three public-listed companies — Sunway Berhad, Sunway Construction Group (SunCon), and Sunway REIT — with a combined market capitalization of RM16.5 billion, allows it to effectively execute its ‘Build, Own, Operate’ business model. The process typically begins with landbanking and master-planning, followed by design and construction, marketing and sales, property management and, lastly, capital recycling via Sunway REIT upon the maturity of properties.

Here are 12 things I learned from the 2019 Sunway AGM:

1. Group revenue grew 3.3% year-on-year (YoY) to RM5.4 billion and net profit improved 4.9% year-on-year to RM658.4 million in 2018, despite the adoption of MFRS 15, which affected the timing of revenue and profit recognition for the group’s overseas property development activities. Progressive profits of RM103.7 million from the group’s Rivercove Residences project in Singapore and Sunway Gardens project in Tianjin, China which would have been recognised in 2018 and resulted in net profit growth of 21.5% were deferred until they were completed, due to adoption of the new accounting standard.

Source: Sunway Berhad annual reports

2. Dividend per share (DPS) for 2018 was 7.12 sen, which includes a share dividend distribution equivalent to 1.62 sen per share, translating into a dividend yield of 4.2% (based on share price as at 23 July 2019). Although DPS for 2018 was 18.7% higher than the previous year’s of 6 sen, DPS has fallen from the range of 9-11 sen during 2013 to 2016. Sunway maintains a minimum dividend payout policy of 20% of core net profit.

3. The Property Development division reported revenue of RM619.8 million (-33.8% YoY) and profit before tax (PBT) of RM158.4 million (-34.5% YoY). The poorer performance was mainly due to lower sales and progress billings from local development projects, and the completion and handover of fewer projects in 2018. Management attributed the weaker sales performance to the weak property market and uncertainties arising from changes in government policies. In 2018, Sunway launched property projects with a total gross development value (GDV) of RM2.1 billion, compared with RM1.1 billion in 2017. From new launches and other ongoing projects, the group registered higher total sales of RM1.9 billion in 2018, compared with 1.2 billion in 2017, despite the soft property market. For 2019, management targets to achieve property launches with a GDV of RM2 billion and total sales of RM1.3 billion. Sunway’s new property launches in 2019 have so far achieved impressive take-up rates of over 70% as of June 2019, while take-up rates for new launches for the industry are expected to remain at 50% and below. Sunway has 3,289 acres of remaining landbank as at 31 March 2019, which could sustain a development period of up to 15 years.

4. Sunway’s Property Investment & REIT division, which includes the Leisure and Hospitality divisions, reported revenue of RM814.8 million (+3.9% YoY) and PBT of RM291.2 million (+14% YoY) in 2018. The growth in revenue was mainly driven by additional contribution from new and additional room inventory at The Banjaran Hotsprings Retreat & Spa in Ipoh, as well as higher contribution from the group’s theme parks. PBT growth was driven by the better performance from Sunway Velocity Mall. As at 31 December 2018, the division had RM9.9 billion in assets under management and a total net lettable area of 10.2 million square feet, which generate stable and recurring rental income through the group’s 40.9% owned Sunway REIT.

5. Sunway’s Leisure division operates two signature theme parks – Sunway Lagoon in Sunway City and Lost World of Tambun in Sunway City Ipoh, Perak – which garnered 2.4 million visitors in 2018. The group’s Hospitality division operates 11 hotels and resorts with an inventory of 3,386 guestrooms in Malaysia, Cambodia, and Vietnam. The divisions’ expansion strategies for 2019 include penetrating regional and international markets, collaborating with Tourism Malaysia, and offering publicity and promotions via airlines.

6. The Construction division (through SunCon) reported revenue of RM1.8 billion (+13.5% YoY) and PBT of RM190.3 million (+1.4% YoY) in 2018. Revenue growth was driven by higher progress billings from local construction projects, while the lower PBT growth was affected by lower profit contribution from the precast division. Major projects completed in 2018 include Emerald Residence and Emerald Boulevard 88 in Sunway Iskandar, International School of Kuala Lumpur, and Gas District Cooling Plant and Parcel F in Putrajaya.

7. Within the first three months of 2019, SunCon has already secured two thirds of its targeted order book replenishment of RM1.5 billion for 2019, lifting its outstanding order book to RM5.7 billion. Management plans to expand the business to ASEAN and India in the future: in Myanmar, the group signed a Memorandum of Understanding with conglomerate Capital Diamond Star Group for cross learning in April 2019; in India, it is tendering for three rail and road projects via a joint venture with a local contractor; in Singapore, it plans to venture into the piling business and is also investing S$80 million to build a precast plant as part of its participation of the Integrated Construction Prefabrication Hub. Upon completion, the plant would be fully mechanized with a total capacity of 100,000 cubic metres per annum. Locally, SunCon is tendering for Malaysia’s Renewable Energy project under the third round of the Large-Scale Solar scheme.

8. Sunway’s Healthcare division, with Sunway Medical Centre (SMC) as the flagship hospital, reported revenue of RM459.7 million (+26.1% YoY) and PBT of RM59.9 million (+6.2% YoY) in 2018. The improved performance was mainly driven by higher patient volume and the opening of new wards at Tower C of SMC in 2018. As at 31 March 2019, the hospital had 636 licensed hospital beds, 200 specialist consultation suites, 12 operating theatres and a multi-storey car park with 1,470 parking bays. In its expansion pipeline, Sunway Velocity Medical Centre, which is currently under construction, is set to commence operations in August 2019. 

9. The Quarry division reported revenue of RM223.4 million (+10.5% YoY) and PBT of RM8.7 million (+24.2% YoY) in 2018. The improved performance was mainly driven by higher average selling prices of premix and sales volume for aggregates. During the economic crisis of 1998, Sunway was forced to dispose of the quarry business, but subsequently re-entered the business in 2005. In March 2019, Sunway announced that it was acquiring Blacktop Industries Sdn Bhd, which is in the business of production and selling of quarry aggregates and asphalt premix, as well as renting of mobile equipment, for RM70.1 million. Management said that the acquisition will allow the quarry division to penetrate new markets by wider market coverage and additional capacity. In June 2019, Sunway announced it was buying 784 acres of leasehold land in Ulu Langat, Selangor with the quarry plant and machinery from Dolomite Corporation Bhd for RM125 million. After completing the acquisitions, Sunway will have nine quarries and 23 asphalt plants, representing 15% and 30% respectively, of the domestic market share.

10. Sunway’s Trading and Manufacturing division reported revenue of RM1.1 billion (+10.7% YoY) and PBT of RM48.3 million (-1.0% YoY) in 2018. Revenue growth was driven by higher local and overseas sales while PBT was affected by lower operating margins. The division, which began operations in 1983, has regional presence that extends across 41 locations in Malaysia, Singapore, Thailand, Indonesia, China and Australia, serving a clientele base of nearly 13,000 from different industries. In 2018, the division increased its agency lines from 150 in 2017 to 166, with the new additions covering a wide range of brands. Demand fell for some of the division’s products in 2018 as a result of deferments and cost-cutting measures for major infrastructure projects. Management revealed plans to expand the number of Jaya DIY Marts – the division’s retail DIY chain selling hardware and household products – from one to three. The Jaya DIY Mart business contributes less than 1% to the group’s revenue and incurred minor losses in the past two years.

11. The Building Materials division reported revenue of RM215.9 million (-2.9% YoY) and PBT of RM19.6 million (-47.0% YoY) in 2018. The poorer performance was attributed to lower sales volume for pavers and vitrified clay pipes (VCP), which were mitigated by higher sales volume of spun pile in overseas operation. Demand for pavers and VCP, which is dependent on the performance of the local industry, was adversely affected by the continuous overhand in the local property market.

12. The Minority Shareholder Watch Group asked whether the impairment loss for the Bus Rapid Transit (BRT) Park N’ Ride facilities, that was incurred in 2017, had recurred in 2018. Management answered that there was no impairment for the BRT facilities in 2018 as the impairment of RM18 million was fully taken up in 2017. Management revealed that although the BRT facilities were loss-making in 2018, it is expected to turn around by the end of the year. So far in 2019, results are showing positive improvement.

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Young Jia Yi

Jia Yi has been an investor since the age of 18, following the investing philosophies of Buffett and Munger. He currently works as an industry analyst in an independent investment research firm. He is passionate about understanding how things are interconnected in the world and enjoys reading in his free time.

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