• We make no changes to our FY17-19F earnings forecasts, and maintain our BUY call on Sunway with an unchanged SOP-based fair value of RM3.81 per share. This was derived after applying a 20% discount to its property development division’s RNAV, and pegging its construction division at 14x CY18F P/E, in line with our target P/E of 13-15x for mid-sized construction stocks.

• Sunway has proposed to undertake a bonus issue exercise of up to 2.8bil new shares on the basis of four bonus shares for every three existing shares held (4-for- 3) on an entitlement date to be determined later. This is to be effected by way of capitalising the share premium of the company.

• It has also proposed a bonus issue of up to 631.0mil free warrants in Sunway on the basis of three warrants for every 10 existing shares held (3-for-10) on the same entitlement date as the proposed bonus issue. The proposals are expected to be completed by 2H17.

• The exercise price of the warrants will be determined at a later date, taking into consideration the 5-day volume weighted average market price of Sunway shares prior to price-fixing date, adjusted for the proposed bonus issue of shares, with a discount or premium to be determined later based on market-based principles. The warrants will be valid for 7 years.

• We are positive on the proposed bonus issue of shares and warrants. On the bonus issue of shares, it is a way to reward shareholders while preserving cash in the company. Additionally, we expect the marketability and trading liquidity of Sunway shares to be improved by the larger capital base and lower price per share

• On the bonus issue of warrants, assuming full exercise of the warrants at an indicative exercise price of RM1.53 per share, the company could potentially raise the maximum gross proceeds of RM965.4mil. Although in the short term the warrants might be dilutive to the EPS, we believe in the long-term, the proceeds will be utilised to grow the company further, which will be positive to its long-term EPS growth.

Source: AmInvest Research - 15 Jun 2017