News

• Sunway has proposed to dispose Sunway Clio Property, which includes a 19-storey, 4-star hotel with 401 rooms, 3- storey retail space of 88k sqft and a multi-storey car park with 732 bays for a total of RM340m.
• Proposed to lease back the hotel for 10+10 years at the higher of minimum rent of RM11m for the first 2 years and RM8.2m for remaining 8 years thereafter or variable rent.
• Proposed to lease the carpark for 3+3 years at variable rent.
• The disposal is expected to be completed towards the end of FY17 pending relevant approvals. Financial Impact
• Understand that RM275.3m of the proceeds of RM340m will be used to pare down borrowings and the remaining will be retained as working capital.
• Sunway is expected to incur minimum rental expenses of RM20.2m pa (guaranteed rent) for the first 4 years and variable rents thereafter, which is expected to be more than offset by potential interest savings, return from working capital as well as additional income from SREIT.
• The current net gearing would improve to 0.38 from 0.43. Besides, there is an estimated disposal gain of RM29.4m from this proposal which will be deemed as a non-core profit.

Pros/Cons

• We are positive on the disposal as it instantly unlocks the value of the property at 1.16x book value and increases our SOP by 1.3% after eliminating the usual discount on RNAV.
• Besides, the property would also generate rental income to Sunway via the 37.3%-owned SREIT. It is also more efficient to operate under SREIT which commands a better valuation at ~1.4x book value.
• We opine that property would complement the existing assets of SREIT and at the selling price of RM340m vs book value of RM293.1m. The property’s implied gross yield of 6% is considered fair given the current yield environment.
• Notably, there is more than RM1bn worth of mature properties (Figure #2) sitting in the book that can be further unlocked in future.

Risks

• Prolonged downturn in Johor’s property market;
• Execution risk.

Forecasts

• Unchanged given no material impact on earnings forecast.

Rating

BUY ↔ , TP: RM5.14 ↑

• Sunway is our Top Pick within the sector as we believe it
   
• should be rerated and trade closer to its peers such as IJM and Gamuda (refer to Figure #1) given its diversified income stream and declassification from property sector. At a P/E of 14x as compared to peers, we opine that it represents a deep value stock with potential assets unlocking and growing healthcare business which are underappreciated.

Valuation

• We factor in the disposal and remove the 35% discount pegged on RNAV of the investment property, resulting in a higher TP of RM5.14 (from RM5.07) based on SOP derived valuation with a 10% holding discount.

Source: Hong Leong Investment Bank Research - 04 Aug 2017