News  Last Friday, Sunway Berhad (SUNWAY) proposed to list its construction division that is currently held under its indirectly wholly-owned subsidiary, Sunway Construction Sdn Bhd (SUNCON), on the Main Market of Bursa Malaysia Securities.

Comments  We were surprised by the announcement, as we did not expect SUNWAY to relist its construction unit shortly within three years since the merger between Sunway Holdings and Sunway City back in 2011, which was aimed at creating synergies between the two entities and minimizing RPTs. The key difference in the new structure is that there are no overlaps in property and construction businesses between both entities, as seen in the past, which puts to rest investors’ concerns of conflicts of interests.

 Nonetheless, we are still positive with the proposed listing of SUNCON due to the following reasons; (i) synergies between SUNWAY and SUNCON would be maintained and management had reiterated that SUNWAY’s property division margins would not be affected given that SUNCON are still required to go through competitive bidding process for internal building jobs, (ii) an exercise to reward SUNWAY shareholders through dividend-in-specie of SUNCON shares based on entitlement ratio of 1 SUNCON shares for every 10 SUNWAY shares held, coupled with a special cash dividend from the proceeds of the listing of SUNCON shares which is expected to be completed by 2Q15.

 Our SoP values SUNCON’s market capitalisation at RM1.2b or RM0.89 per share based on 15x FY15 PER and SUNWAY would be able to raise a proceeds ranging from RM331.1m to RM357.6m depending on the conversion of warrants and ESOS. Based on our assumptions, we expect each Sunway shareholder to get 1 share in SUNCON for every 10 SUNWAY shares held worth RM0.89/share and cash dividend ranging from of 12.75 sen to 16.60 sen. (refer overleaf for more details.) (iii) un-locking of value in its construction division whilst benefiting Sunway Bhd through less holding company discounts which would enhance its property valuations.

Outlook  While the property market remains fairly quiet, we believe that SUNWAY is on track to meet its sales target of RM1.8b for FY14 given that recent launches, like Sunway Geo Residence 2 and Citrine, has received encouraging bookings rate of 70% and 100%, respectively. Based on channel checks, we gather that 40%-50% of its Sunway Geo Residence 2 bookings had been converted into sales.

 Its property unbilled sales remains fairly strong at RM2.4b with remaining external orderbook of RM1.9b that easily provides another 1-1.5 years visibility.

Forecast  No changes to our FY14-15E estimate at this juncture.

Rating Maintain OUTPERFORM

Valuation  We are raising our Target Price for SUNWAY from RM3.70 to RM3.87 as we roll forward our SoP driven valuation base to FY15E from FY14E (refer overleaf for more details.)

 We also reiterate our OUTPERFORM call on SUNWAY for its ability to deliver healthy sales despite the multiple cooling measures undertaken to cool off the property market.

Risks to Our Call Unable to meet sales targets or replenish landbank. Sector risks, including additional negative policies.

Source: AmeSecurities