Sunway has proposed to dispose its Sunway University Property to Sunway REIT for a consideration of RM550m. We are positive on the disposal as it unlocks the value of the property at 1.13x BV and increases our SOP by 2.3%. The disposal will enable Sunway to reinvest its capital into other core business activities. We tweak our earnings forecast slightly by FY19: 0.2% and FY20: 0.4% as we impute the finance cost savings from the repayment of borrowings and lower contributions from the Property Investment segment. Maintain BUY with slightly higher TP of RM2.18 (was RM2.13) based on a 10% holding discount from SOP-derived valuation

NEWSBREAK

Sunway has proposed to dispose its Sunway University Property (733k sqft of land and 1.88m sqft GFA of buildings) to Sunway REIT for a consideration of RM550m. The disposal includes the South Building, North Building, New University Block, and Hostel and Sports Facilities but excludes the South Annex Building, Graduate Centre, East Building and International School. The disposal is expected to be completed by 1H19 pending relevant approvals.

HLIB’s VIEW

Positive on the news. We are positive on the disposal as it unlocks the value of the property at 1.13x BV and increases our SOP by 2.3%. The disposal will enable Sunway to reinvest its capital into other core business activities. Besides, the property would also generate rental income to Sunway via the 40.9%-owned REIT.

Utilisation of proceeds. Note that the proceeds will be utilised in the following manner: (i) RM238.6m for repayment of borrowings, (ii) RM311.3m for future working capital and capital expenditure (including the development of new medical centres), and (iii) RM0.2m for expenses relating to the proposed disposal.

Financial impact. Based on our estimates, the net interest saved from the repayment of borrowings is expected to be c.RM8m p.a. We expect earnings of the Property Investment segment to drop by c.RM5.5m p.a. with the absence of rental income from the disposal. Our pro-forma calculation implies that net gearing would decrease to 0.39x post disposal, from 0.46x as at 3QFY19.

Forecast. We tweak our earnings forecast slightly by FY19: 0.2% and FY20: 0.4% as we impute the finance cost savings from the repayment of borrowings and lower contributions from the Property Investment segment.

Maintain BUY with slightly higher TP of RM2.18 (from RM2.13) based on a 10% holding discount from SOP-derived valuation of RM2.18 (Figure #1), after factoring the disposal of the investment property. Despite the down cycle of both property development and construction sectors, we continue to like its resilient integrated real estate business model and earnings growth prospect with mature investment properties and underappreciated trading and healthcare businesses.

Source: Hong Leong Investment Bank Research - 26 Dec 2018