News  Yesterday, Sunway Berhad (SUNWAY) announced that they have entered into a SPA with Sunway Real Estate

Investment Trust (SUNREIT) for the disposal of two assets namely Sunway Hotel Georgetown and Wisma Sunway for a total consideration of RM134.0m and they also entered into a master lease agreement for the leaseback of Sunway Hotel Georgetown Property from SUNREIT for a period of 10 years with an option to renew for a further term of 10 years. The deal is a related-party transaction.

Comments  We were not entirely surprised with the announcement as it is always part of SUNWAY’s business model to spin off their investment properties into SUNREIT to further unlock value and recycle its capital into new investments.

 SUNWAY is expected to register a one-off net gain of RM23.4m from the proposed disposal that would be recognised in 1H15. There will be a net loss in recurring income stream after taking into account the absence of these assets contributions while SUNREIT (Sunway owns 34.6% stake) takes on the new income stream. However, the impact is not material as these assets’ contribution only makes up less than 1% of its FY15E core earnings of RM572.0m.

 Upon the completion of the disposal, SUNWAY is expected to utilise RM45.0m to repay bank borrowings while the remaining RM89.0m as working capital. Net gearing (as of 9M14) will come off slightly from 0.31x to 0.29x.

 All-in, we are neutral to positive on the disposal. It helps the group to unlock its prized investment assets’ value while enhancing the portfolio of its daughter company. However, the disposal does not have significant impact to their earnings while the one-off gain will not be distributed to shareholders.

Outlook  The next catalyst for SUNWAY would be the listing of its construction arm by the end of 1H15.

Forecast  No changes to our FY14-15E core earnings estimate at this juncture. However, we have adjusted our net profit higher by 3% after factoring in the one-off gain on disposal of RM23.4m.

Rating UNDER REVIEW

Valuation  Impact of the disposal results in only 2 sen increase in our SoP to RM3.89 after taking into account the disposal and impact on SUNREIT (refer to SUNREIT report). Note that the SUNREIT TP will increase by 1 sen from this acquisition to RM1.57, but we have taken the opportunity to roll SUNREIT’s valuations to FY16, resulting in a much higher TP of RM1.68. Assuming unchanged property and SoP discount, this would increase our TP by 2% to RM3.94.

 Our CALL and TP on SUNWAY are UNDER REVIEW with a potential downside bias, pending our upcoming sector strategy. Our previous recommendation was OUTPERFORM with a TP of RM3.87

Risks to Our Call Unable to meet sales targets or replenish landbank.

Sector risks, including additional negative policies.

Source: Kenanga