• Sunway’s 559-acre BKIP2 land deal has been aborted, the Edge reported today. While land price was attractive, it removes a key overhang, in our view.

• We think Sunway will be able to recover the majority of the RM64m initial payment. Reiterate Add and TP of RM2.57 (10% discount to SOP).

BKIP2 Land Deal Aborted?

• The Edge, a local financial media group reported on 17 Oct that Penang Development Corporation (PDC) is ending its collaboration agreement with Umech Land (in which Sunway has a 70% equity stake) for the development of the 559-acre Batu Kawan Industrial Park 2 (BKIP2). Sunway had announced this land deal on 27 Sep. The land was supposed to have a GDV of RM3.5bn and to start development in early-2025F.

• Despite Penang’s Chief Minister Chow Kon Yeow (who is also PDC Chairman) being supportive of the deal previously, the reason for its cancellation is the change in majority equity structure of Umech Land prior to deal announcement, the Edge said.

• According to an Edge weekly article dated 15 Oct Sunway had invested RM23m on 25 Sep for a 70% equity stake in Umech Land, just two days prior to the announcement of the land deal. On top of this, Sunway had made a total downpayment of RM64m (10% of the land entitlement of RM646m due to PDC). PDC was not informed of this change in shareholding, the report said.

• The Edge also highlighted that the Penang Chinese Chamber of Commerce had concerns over the low price of RM27 psf for this land (vs. an estimated market price of RM80psf if the land were to be sold in smaller parcels).

What’s the Worst-case Scenario?

• In response, Sunway in a filing to Bursa Malaysia said it has yet to receive a formal letter of termination of the Joint Development Agreement from PDC. With this termination, PDC will advertise for a request for proposal to develop the said land according to the Edge article today. We do not discount Sunway bidding for this land alone.

• We think there is a certain amount of reputational damage on Sunway with this land deal given the controversies behind it. From a financial standpoint, we think it should be able to recover the majority of the initial downpayment of RM64m.

• While this acquisition would have increased its industrial landbank to 21% of its total outstanding landbank (from 7%) and provided the group a foothold in the industrial landbank space in Penang, this will also remove a key overhang on the stock.

Reiterate Add and TP RM2.57

• We reiterate our Add rating and TP of RM2.57 based on a 10% discount to SOP. We like Sunway as a diversified investment proxy for a robust domestic economy and growing exposure to healthcare.

• Key downside risks: a slowing economy and rising raw material costs which may have a negative impact on margins.

Source: CGS-CIMB Research - 17 Oct 2023