News

• Sunway has announced the ex-date of 27 Sep 2017 for the proposed 4 bonus issue of shares for every 3 existing shares and 3 free warrants for every 10 existing shares.
• The exercise price of the free warrants is fixed at RM1.86, which is at parity to the theoretical ex-bonus price of Sunway computed based on the 5-day VWAMP of RM4.3411.
• Subsequently, the exercise price is subject to a fixed annual step-down of RM0.07 on each of the anniversary dates from the date of first issuance.
• Note that the listing date of warrants will be within 5 clear market days after the entitlement date on 29 Sep 2017, which will fall on 2-6 Oct 2017.

Comments

• We continue to believe that the value of warrant is enhanced by the first-of-its-kind fixed annual step-down mechanism of RM0.07, which is akin to fixed dividend payments worth RM0.42 at year 7. The adjusted exercise prices on respective anniversary are depicted as following. Anniversary 1st 2nd 3rd 4th 5th 6th Excs. price (RM) 1.79 1.72 1.65 1.58 1.51 1.44
• There is no immediate plan to utilize the potential proceeds (~RM909m assuming full conversion at year 7) from the conversion of warrants. We expect proceeds raised to be used for future working capital or deleveraging.
• Beyond the above corporate exercise, the expansion of the Sunway Medical Centre at Sunway City to 618 beds (from 373 beds) is being rolled out progressively towards end- FY17. This is followed by another five new planned medical centres within the next 5 years with a combined 1.7k beds and a potential spin-off of healthcare.
• Besides, we continue to advocate Sunway as a cheaper proxy to its subsidiary SunCon (HOLD, TP: RM2.33) in the booming construction sector premised on its high order book cover ratio of 2.4x at RM4.6bn and potential beneficiary from LRT3.

Risks

• Prolonged downturn in property market.
• Execution risk.

Forecasts

• Unchanged.

Rating

BUY ↔ , TP: RM5.16 ↔

• 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 (Figure #2) given its diversified income stream and declassification from property sector. At a P/E of 14.4x as compared to peers, we opine that it is a deep value stock with mature investment properties and the underappreciated trading and healthcare segment.

Valuation

• Our TP is unchanged at RM5.16 based on a 10% holding discount from SOP derived valuation of RM5.74 (Figure #3).

Source: Hong Leong Investment Bank Research - 08 Sep 2017