Investment Highlights

• We maintain BUY on Sunway with an unchanged SOPbased fair value (FV) of RM2.39/share given the negligible contribution from the newly acquired Sri Hartamas land.  Our FV also reflects a 3% premium for our 4-star ESG  rating (Exhibits 4 & 5). 

• The FV implies an FY24F PE of 16x, 1 standard deviation  above its 3-year median of 12x. 

• Sunway’s wholly-owned Sunway Living Space entered  into a sale and purchase agreement (SPA) with YNH  Property’s wholly-owned Kar Sin to acquire a 5-acre  freehold commercial land at Sri Hartamas, Kuala Lumpur  for RM170mil cash (Exhibit 1).

• We lower our FY23F–25F core net profit by 1% to factor in  the increased finance cost which assumes that the  acquisition cost of RM170mil is fully funded by  borrowings. The earnings contribution from Sri Hartamas  land in FY25F is minimal due to lower progress billing at  the early stage of development. 

• The proposed acquisition is expected to be completed in  4QFY23. Post-acquisition, we expect the group’s FY23F  net gearing ratio to increase to 0.59x from 0.56x.

• Upon completion of the acquisition, Sunway’s  accumulated landbank will inch up by 0.2% to 3,068 acres  from 3,063 acres. 

• This acquisition comes ready with an approved  development order (DO) which provides for a plot ratio of  5. However, if Kar Sin is able to obtain an approved DO  with plot ratio of 7 within a year from SPA date, they will  be entitled to an additional consideration of RM50mil,  bringing the total sales proceeds to RM220mil. 

• We will subsequently revise our earnings forecast and  valuation accordingly in the event that the higher plot ratio  of 7 is attained. 

• The acquisition price translates to RM767 (based on plot  ratio of 5) to RM992 psf (at a plot ratio of 7). Both prices  imply a cost-to-GDV ratio of 20%, which is within the  industry’s average land cost-to-GDV ratio of 15%–20%.

• We deem the Sri Hartamas land as reasonably priced given Hap Seng Consolidated’s recent acquisition of a parcel of  commercial land in KL Metropolis (3km from Sri  Hartamas), which was priced at RM1,300 psf.

• Sunway plans to develop a mixed development comprising serviced apartments, retail, and wellness suites with an  indicative gross development value (GDV) of RM850mil (assuming a plot ratio of 5) to RM1.1bil (assuming a plot ratio  of 7). 

• We anticipate the average selling price for its serviced apartments to be >RM900 psf given the limited land availability  and lack of future residential supply in the affluent township. For reference, the newly developed serviced apartments  surrounding the Sri Hartamas land, such as Dorsett Residences Sri Hartamas and Ooak Serviced Apartments are  priced between RM900-RM1,200 psf.

• Locating in an upscale and modern community with great amenities (Exhibit 2) and strong connectivity to major roads,  we believe Sunway will be able to meet the demand from the affluent population and upgraders from the surrounding  townships (Damansara Heights, Sri Hartamas, Mont Kiara and Bangsar).

• As the project is scheduled to debut in FY25F, we estimate that the project could potentially contribute up to 3% of  Sunway’s earnings from FY25F to FY30F.

• Overall, we are positive on the acquisition which is envisaged to help sustain Sunway’s property earnings over the  medium and long term. Also, the stock currently trades at a compelling FY23F PE of 12.5x vs its 5-year peak of over  20x.

Source: AmInvest Research - 17 May 2023