Investment Highlights

• We maintain BUY on Sunway with a higher SOP-based fair value (FV) of RM2.42/share (from RM2.40/share previously) after taking into account the contribution from Batu Kawan Industrial Park 2 into our RNAV calculation. Our FV also reflects a 3% premium for our 4-star ESG rating (Exhibits 3 & 4).

• The FV implies an FY24F PE of 17x, 1 standard deviation above its 3-year median of 12x.

• Sunway’s 70%-owned Umech Land entered into a joint development agreement (JDA) with Penang Development Corporation (PDC) to undertake the development of a 559- acre leasehold industrial land at Seberang Perai Selatan, Pulau Pinang (Exhibit 1).

• PDC as the proprietor of the land is entitled to a land entitlement of RM646mil in making the land available for the proposed development.

• In view that there were no additional profit-sharing components outlined in the JDA, we consider the fixed payment of RM646mil to PDC as the land cost for the project.

• The land entitlement fee is expected to be funded by a combination of borrowings (70%) and cash (30%) based on Sunway’s historical funding mix for land acquisition.

• A performance deposit worth RM65mil (10% of land entitlement) will be paid to PDC upon the signing of JDA. The balance payment of RM581mil is payable to PDC on a deferred payment scheme over 4 years from the signing of JDA.

• We expect the group’s FY23F/FY24F/FY25F net gearing ratio to inch up to 0.54x/0.55x/0.56x from 0.53x/0.54x/0.54x.

• Hence, we lower FY23F/FY24F/FY25F core net profits by 0.3%/0.6%/1.6% to factor in increased finance costs resulting from higher borrowings arising from the acquisition.

• Sunway plans to develop an industrial park known as Batu Kawan Industrial Park 2, comprising factories, industrial lots and commercial components with an indicative gross development value (GDV) of at least RM3.5bil.

• Sunway is targeting electrical and electronics, semiconductors and appliances sectors within the industrial park.

• The project is scheduled to debut in early FY25F and be developed over a span of 8 years. We estimate a negligible FY25F contribution with a gradual increase to 5% of Sunway’s earnings by FY29F.

• Valuation-wise, we deem the land cost of RM27 psf as attractive after comparing to the asking price of industrial lands in the surrounding areas, which were priced within the range of RM32 psf to RM52 psf.

• Meanwhile, the land cost implies a land cost-to-GDV ratio of 18%, which is within the industry’s average land cost-toGDV ratio of 15%-20%.

• This venture marks Sunway’s second foray into industrial park development, following its recent acquisition of industrial land in Rawang in August 2023.

• We are positive on this development given strong demand for industrial properties in Batu Kawan, Penang, from both local and international investors. Additionally, Batu Kawan Industrial Park 2 aligns well with Malaysia's New Industrial Master Plan 2030, making it a strategic and attractive development.

• The stock currently trades at a compelling FY24F PE of 14x vs. its 5-year peak of over 20x.

Source: AmInvest Research - 29 Sept 2023