News

• Sunway has announced to acquire the remaining 20% of the share capital in Sunway South Quay Sdn Bhd (SSQ) from EPF 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 this will increase Sunway stake to 100% (from 80%), following the proposed acquisition of 20% stake from Kuwait Finance House earlier this month.
• The acquisition will be funded by a combination of bank borrowings and internal generated funds.

Comments

• Similar with the previous proposal, we are mildly positive on the proposed acquisition of another 20% stake at the same price of RM210m.
• The price tag is equivalent to trailing P/E of 8.8x vis-on-vis Sunway’s 16x, based on reported earnings of RM120m (100% stake) before any inter-company elimination.
• Following both proposed acquisitions, SSQ will be a wholly- owned subsidiary of Sunway Berhad via Sunway Lagoon Sdn Bhd.
• With remaining land bank of more than 30 acres at an estimated GDV of more than RM3bn under SSQ, having full control over the timing of future launches and product mix help to maximize the 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 13x 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 maintained at RM2.25, based on a 10% holding discount from SOP derived valuation of RM2.50 (Figure #2).

Source: Hong Leong Investment Bank Research - 31 Oct 2017