News

• Sunway has proposed to acquire: 1) A parcel of 5.3 acres freehold land in Kajang, Selangor with semi-completed buildings structure erected via a related party transaction for RM63.0m. 2) 4 parcels of freehold land totalling 14.8 acres in USJ1, Subang Jaya for RM167.6m.
• The proposed mixed development (target launch in FY19) on the Kajang Land comprises of serviced apartments/SOHO and commercial lots with a combined GDV of RM460m to be developed within 5 years.
• Sunway will utilize the 4 industrial lots in USJ1 as warehouses and storage facilities for its trading and manufacturing businesses with a redevelopment plan (estimated GDV of RM1.4bn) in the medium term.
• The purchases are expected to be funded via debt and internal generated funds. Target completion by 1Q18. Financial Impact
• The implied land costs for Kajang land and USJ1 land are circa RM274 psf and RM260 psf, respectively.
• The respective land cost to total GDV ratios are deemed competitive at 13.7% and 12.0%, respectively. Also there is substantial saving on construction costs with the existing ready concrete structure framework at Kajang land.
• The projects’ NPVs are estimated at RM105m, which increase our estimated RNAV for property segment by 1.0% and raise our target price by 0.6%.

Pros/Cons

• We are neutral with positive bias on the RNAV accretive acquisitions as they will expand the group’s landbank to 3.3k acres and effective GDV by 3.6% to RM53.5bn despite no contribution to immediate earnings.
• We believe that the proposed TOD development at Kajang should gain good interest with seamless integration with existing MRT station and it is 2km away from Kajang town.
• Although there is no immediate intention to redevelop the USJ1 lands, it will help to minimize logistic costs for trading and machinery businesses given its strategic location.

Risks

• Prolonged downturn in property market;
• Execution risk.

Forecasts

• Unchanged as the estimated earning contributions are beyond our forecast horizon.

Rating

BUY ↔ , TP: RM5.07 ↑

• Sunway remains our Top Pick within the sector as we believe it should be rerated and trade closer to its peers such as IJM and Gamuda given its diversified income stream and declassification from property sector. At a P/E of 14.2x as compared to peers, we opine that it is in deep value with potential assets unlocking and growing healthcare business which are underappreciated.

Valuation

• Our TP is raised to RM5.07 (from RM5.04) based on SOP derived valuation with a 10% holding discount

Source: Hong Leong Investment Bank Research - 02 Aug 2017