News

Proposed rights issue of up to 594.5m new shares on the basis of 1 rights share for every 3 existing shares held with an issue price of RM1.70, raising a total of RM363m- 1,011m. Subsequently, the exercise price and number of existing warrants (258.5m outstanding, convertible to 1 new share, expiring in Aug-16) will be adjusted accordingly.

Proposed ESOS for an initial period of 6 years, with an option to extend for another 4 years. Maximum number of ESOS shares shall not exceed 15% of issued shares with an exercise price of a discount of up to 10% to 5-day VWAP. The proposal is expected to conclude in 4QFY13.

Comments

Attractive issue price# We are pleased with the attractive discount of the issue price of RM1.70 which represents 39% and 43% discount from the TERP (Theoretical Ex-Rights Price) of RM2.80 and our Ex-Rights Target Price of RM2.96 respectively. It will benefit all shareholders as a cheaper investment entry into the stock. Hence, we believe that the rights issue will be fully subscribed.

Improved gearing# Based on our estimates (see Figure #1), some RM730m cash will be raised, thus improving Sunway’s gearing levels significantly from a net debt of RM1.61bn to RM874m. Hence, net gearing will drop from 45.2% to 20.4%.

Expansion plans# The cash call will be utilised to develop its investment properties, land bank acquisitions, and capex. However, due to timing of proceeds utilisation, the funds will be instead used to repay its debt first before drawing-down on its credit facilities when the need arises. Hence, there is no urgency for Sunway to dispose its high yielding rental assets for additional funds to facilitate its expansion plans.

Aligning shareholders interests# Meanwhile, the proposed ESOS will ensure that Sunway retains and attracts talented employees. It will also align the interests of both employees and shareholders.

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

Unchanged pending conclusion of the deal.

Rating

HOLD With less than 10% upside from our TP, we downgrade Sunway to a HOLD call. The company has to achieve stronger new property sales especially in Medini Iskandar before we upgrade our TP.

• Positives: (1) Faster monetisation of its property development projects; (2) Deep values and is still trading at a discount to its peers; (3) Integrated construction/property business model.
• Negatives: (1) Slower take-up for its property launches.

Valuation

• TP maintained at RM3.38 based on SOP valuation while our theoretical ex-rights TP works out to RM2.96

Source: Hong Leong Investment Bank Research - 8 Apr 2013