Sunway has proposed to dispose The Pinnacle Sunway to Sunway REIT for a consideration of RM450m. We are positive on the disposal as it unlocks the value of the property at 1.1x BV which further fortifies its balance sheet. Our pro-forma calculation implies that net gearing would decrease to 0.39x post disposal, from 0.43x as at 1QFY20. If we include the proposed ICPS exercise, net gearing would further ease to 0.28x. We keep our earnings forecast unchanged and maintain BUY with an unchanged TP of RM1.95 based on a 10% holding discount to a SOP-derived value of RM2.17.

NEWSBREAK

Sunway has proposed to dispose The Pinnacle Sunway (7,285 sqm of land and 576.8k sqft of NLA) to Sunway REIT for a consideration of RM450m. The building is currently fully occupied and generated a Gross Rental Income of RM36.4m in FY19. The disposal is expected to be completed in 4QFY20 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 1.1x BV which further fortifies its balance sheet. The proceeds will be used to pare down its borrowings. Our pro-forma calculation implies that net gearing would decrease to 0.39x post disposal, from 0.43x as at 1QFY20. If we include the proposed ICPS exercise, net gearing would further ease to 0.28x.

The building. The Pinnacle Sunway is a 24-storey office building with 3-storey mezzanine floors and 6 levels of basement carpark located in Bandar Sunway. The building is c.6.5 years old with a leasehold expiring on Apr-2097. The NBV stands at RM410m as of FY19.

Financial impact. The reduction in borrowings from this proposed exercise is expected to result in an interest savings of c.RM16.8m p.a. We estimate earnings of the Property Investment segment to drop by c.RM7m-RM9m p.a. with the absence of rental income from the disposal which is partially mitigated by improved contributions via the 40.9%-owned REIT.

Forecast. We keep our earnings forecast unchanged for now as the net impact is rather minimal.

Maintain BUY with an unchanged TP of RM1.95 based on a 10% holding discount to a SOP-derived value of RM2.17. Sunway remains our top pick given its well integrated property and construction segments. Its hidden gem, the healthcare business (with 4 new hospitals coming on stream over the next three years) has yet to be appreciated as it is embedded within the parent-co. These coupled with the resilient earnings from mature investment properties alongside its growing building materials business and quarry operations justifies for the re-rating of the stock.

Source: Hong Leong Investment Bank Research - 30 Jun 2020