- We maintain HOLD on Sunway with a raised SOP fair value of RM3.42/share (vs. RM3.08/share previously on 5% discount to SOP), to account for a higher valuation for its construction division from 10x previously to 12x.

- Sunway has proposed to list its construction division and with it, a share dividend-in-specie and special cash dividend, which combined translates to a yield of 7%-10% per share.

- We expect construction to contribute 20%-25% of the group’s FY14F-FY16F earnings. With an effective disposal of a ~44% stake, the group’s earnings could be reduced by 8%-11%. The division now accounts for 21% or 71 sen of our SOP value vs.16% previously.

- We remain neutral, but apart from realising returns from the cash dividend, the proposals offer shareholders the option of staying invested in SCG for potential capital gain or exit upon the listing. Post-listing, SCG could account for ~13% of our SOP value for Sunway.

- Sunway will retain control with a 55.62% stake; 13.3% will be distributed 1-for-10 as dividend-in-specie to Sunway shareholders, 25.5% offered to local and foreign institutional investors, and 5.5% to retail investors, including directors and employees.

- The proceeds from the institutional and retail offerings will be distributed to Sunway shareholders via a special cash dividend, minus working capital and expenses. It expects to submit the proposals to the authorities by 4Q14, call for the EGM by 1Q15, and complete the proposals by 2Q15.

- The new holding company Sunway Construction Group Bhd (SCG) will have a paid-up capital of RM258.6mil comprising 1,292.9mil shares of 20 sen each. At RM1.00/share, SCG would be priced at 13.5x and 10.2x PE of our FY14F and FY15F construction earnings. We expect the IPO valuation to be within that range. Assuming a PE of 11x, SCG would be priced at RM1.07/share based on our FY15F EPS of 9.8 sen, with a market cap of RM1.38bil.

- At RM1.07/share, the share dividend is worth 10.7 sen/ share and the offer for sale could raise between RM396mil and RM429mil. Assuming between 75% and 95% of the proceeds are distributed, the total payout along with the share dividend could be at 25 sen- 34sen/share or a yield of 7%-10% at the current price.

- Also proposed is an over-allotment option and claw-back and reallocation provisions. Management says it will ensure that the listed construction group is Syariah-compliant from the outset.

Source: AmeSecurities