News

• Sunway has announced to acquire 20% of the share capital in Sunway South Quay Sdn Bhd (SSQ) (a 60%-owned subsidiary) from Kuwait Finance House for a total consideration of RM210m (RM137m in cash and RM73m in the settlement of Musyarakah Capital investment in SSQ).
• The acquisition is expected to complete by 4Q17 and it would then increase Sunway total stake to 80%, with the remaining 20% stake owned by EPF.
• The acquisition will be funded by a combination of bank borrowings and internal generated funds.

Comments

• We are mildly positive on the acquisition of 20% stake in SSQ at a price tag of RM210m, which is equivalent to trailing P/E of 8.8x vis-on-vis Sunway’s 16x.
• In FY16, SSQ reported a RM120m profit (100% stake) before any inter-company elimination.
• With remaining land bank of more than 30 acres at an estimated GDV of more than RM3bn under SSQ, increasing the stake would undoubtedly raise the future profitability of the group.
• The ongoing projects under SSQ include Sunway Geo (a 67% owned JV with Mitsui Fudosan), an integrated development in Sunway City which comprises residences, retail shops and offices with a GDV of more than RM2bn.

Risks

• Prolonged downturn in property market.
• Execution risk.

Forecasts

• Unchanged pending more details on the incremental profitability of the increased stake in SSQ.

Rating

BUY ↔ , TP: RM2.25 ↑

• 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 #1) given its diversified income stream and declassification from property sector. At a forward P/E of 13.9x as compared to peers, we opine that it is a deep value stock with mature investment properties and the underappreciated trading and healthcare segments.

Valuation

• TP is revised to RM2.25 (from RM2.21) after taking into account our latest TP of SunCon (RM2.59). Our TP is based on a 10% holding discount from SOP derived valuation of RM2.50 (Figure #2). Note that we have yet to account for impact of the newly listed warrant -WB into our model as it is currently out of the money.

Source: Hong Leong Investment Bank Research - 11 Oct 2017