News 

Sunway  Bhd  (Sunway )  is  seeking  to  list  Sunway Construction  Sdn  Bhd  (SunCon)  in  2QFY15.  The  entire construction  division  will  be  injected  into  a  newly  formed holding  company, Sunway Construction  Group  Bhd (SCG).

Post-listing  of  SCG,  Sunway  will  be  holding  an  effective stake  of  55.6 5%  in  SCG  while  the  remaining  13.3%  and 31.01%  will be  the  in  form of dividend-in-specie (1 for every 10 Sunway shares) and offer  for  sale (OFS), respectively.

Highlights 

This  a  positive  surprise  as  we  believe  the  exercise  will unlock  Sunway’s  value  of  in vestment  in  SCG  as  well  as enhancing  SCG’s visibility as a pure  construction company.

Existing  shareholders  of  Sunway  will  also  be  rewarded  in form of dividend-in-specie  and special cash dividend.

Based  on  our  calculation,  imputing  an  assumption  of  15x P/E  multiple  to  SunCon’s  annualised  PATMI  of  RM100m, SunCon’s  potential  market  cap  would  reach  RM1.5bn,  or RM1.16/share.  Assuming  70%  of  OFS’  proceeds  are declared  as  special  cash  dividend,  existing  shareholders  of Sunway could potentially receive  RM326m (or  19  sen/share; FD:  16  sen/share).  Hence  in  total,  total  capital  repayment worth  RM526m  (or 31 sen/share; FD: 26 sen/share).

Post-listing,  Sunway  will  continue  to  operate  as  usual  and we  do  not  foresee  any  margin  compression  given  that  all property  construction jobs are  bided  on a competitive  basis.

However,  SunCon  could  stand  a  higher  chance  as  it operates  as  an  integrated  construction  company   who  also does  in- house  piling  works  as  well  as  M&E.  We  believe SunCon’s  cost  structure  is   more  competitive  as  it  has  the ability to source its raw  materials in-house.

With  Sunway’s  total  GDV  of  RM50 bn  and  assuming  a conservative  50%  GDC  ex -land  and  net  margin  of  5%, SunCon  would  have  lock -in  earnings  of  at  least  RM1.25bn over  15-20  years  (or  RM62.5m- RM 83.3m  annually).  Apart from  this,  SunCon  would  also  seek  for  more  external projects  as  well  as  in  overseas  markets,  further  enhancing its profitability  going forward.

To date, the construction arm has an order book of RM3.4bn (2.1x FY13 construction revenue) and aim s  to maintain order book  replenishment  of circ a RM2.5bn  for 2014 (inclusive  of RM700-800m  internal orders).

We also do not dismiss the possibility of Sunway inject ing its other  subsidiaries  (trading  &  manufacturing  and  quarry  & building materials)  in the future, as it would  further enhanc e SunCon’s  integrated  approach  and competitiveness.

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

• We  are  positive  as  it  would  res ult  in  SunCon  being  a  pure construction  play  while  enhancing  Sunway’s  shareholders’ value.  However,  we  are  maintaining  our  HOLD recommendation  as total  potential  return is  less than  10%.

Valuation 

• TP  upgraded  to  RM 3.55  based  on  SOP  valuation,  as  we now impute a higher value to SunCon as per  latest guidance from management.

Source: Hong Leong Investment Bank Research - 22 Sep 2014