Investment Highlights

• We maintain BUY on Sunway with a lower SOP-based fair value (FV) of RM2.40/share (from RM2.42/share previously) after excluding the contribution from Batu Kawan Industrial Park 2 from our RNAV calculation (Exhibit 1). Our FV also reflects a 3% premium for our 4-star ESG rating (Exhibit 2).

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

• To recap, on 27th September 2023, Sunway’s 70%-owned Umech Land entered into a joint development agreement (JDA) with Penang Development Corporation (PDC) to jointly undertake the development of a 559-acre leasehold industrial land at Seberang Perai Selatan, Pulau Pinang.

• However, Umech Land received the notice of termination of the JDA from PDC yesterday.

• While the reason is not being stated, the termination appears to be linked to the change in majority shareholders of Umech Land’s equity structure. Sunway had emerged as a majority shareholder of Umech Land 2 days prior to the announcement of the agreement. However, this change in shareholding was not communicated to PDC.

• Following the termination of the JDA, we raised our FY23F/FY24F/FY25F core net profits by 0.3%/0.7%/1.8% to remove the impact of the increased finance cost resulting from higher borrowings arising from the acquisition.

• PDC will refund the deposit totaling RM64.6mil to Umech Land within 30 days from the date of termination of the JDA.

• Upon the termination, PDC will advertise the proposed joint development through a request for proposal. We do not discount the possibility that Sunway could bid again for the joint development.

• We are slight negative on the development, especially given the high demand for industrial properties in Batu Kawan. Nevertheless, the financial impact for Sunway is relatively minor given that this project represents only 6% of Sunway’s previous remaining gross development value.

• The stock currently trades at a compelling FY24F PE of 13x vs. its 5-year peak of over 20x.

Source: AmInvest Research - 25 Oct 2023