· A reputable management team. Datuk Ter Leong Yap and his management team ( Ho Han Sang – CEO, Koong Wai Seng - Deputy CEO/ED, Wong Yuen Teck - Non-ED) has strong property development experience with more than 100 years of collective property development experience. Under the private vehicle, its land acquisitions were mainly financed with cash or via JV structures, which ensure a light balance sheet, critical for a niche player. Future land acquisitions will be done via the listed vehicle to avoid conflicts of interests, of which we are glad to hear. As for the existing wood-based business, it will be retained since it is profitable and self-sustaining.

· Total GDV of RM11.2b (effective: RM7.6b), which can last the group 8-9 years assuming 10% YoY growth in sales. The cash call will be used to finance the acquisition of the following landbanks, namely Suria Serenia @ Salak Tinggi (XiamenU), Medini@Iskandar Malaysia, Suria Hills @ Setia Alam with a total of 425 acres. Together with previously owned projects (Suria Residence), total remaining landbank is 429 acres (non-effective). Based on the description of the projects, the bulk mainly consists of integrated mixed township developments located in the suburbs of Klang Valley. We estimate that some 60% of total GDV is commercial-based but lean more towards landed shoplots, rather than office blocks, and located in suburban areas, which currently lacks commercial activities.

· Attractive land costs translate into strong margins. Sunsuria has been able to source land at attractive prices as the target landbanks worked out at an average 9% of total GDV (save for Suria Hills) based on current land value, which implies richer-than-average gross margins of closer to 40%. Land cost is considered cheap as most acquisitions make up 10%-15% of GDV (especially Xiamen University Township that forms more than 50% of its landbank GDV, is only around 10%), while developers’ land costs (for those under our coverage) tend to range from 5%-14% of GDV. As such, their project margins are likely to be within 35%-40% while we estimate FY16-17E group’s gross margins of 38%- 39%. Once earnings normalizes due to maiden contributions from the private entity, SUNSURIA’s FY16-17E net margins of 18.6%-20.3% will be comparable to industry average net margins of 21%.

· Light balance sheet allows for more landbanking? While the group has tried to avoid borrowings to finance land acquisitions as a private entity, they are also aspiring to become a sizeable developer. Going forward, the group is on a continuous lookout for more landbanks in Greater Klang Valley or more landed developments in Johor. They are willing to fund landbanking via borrowings with an internal net gearing limit of 0.3x. However, we expect the company to remain net cash over the next three years (currently net cash of 0.11x), while replenishment of GDV is likely to take the form of JV with landowners to minimize balance sheet risks. We believe SUNSURIA can replenish an additional RM3.3b GDV, on the assumption that it can borrow up to RM0.3b before hitting the net gearing limit of 0.3x, and assuming land cost at 10% of GDV.

· We estimate FYE16-17E core earnings of RM50.8m-RM145.7m or 558%- 187% YoY growth. The group is targeting RM0.9b-RM1.1b of launches in FY16- 17E, which would feature maiden launches of all its newly injected landbanks, mainly from Xiamen University Township. We estimate FY16-17E sales of RM789m-RM830m. The strong earnings growth over the next few years is mainly due to the low base effect as new project earnings recognitions (mainly from strong launches at Xiamen University Township, Suria Residence, and Sunsuria Medini) will only normalize in FY17.

· Ex-all FV of RM1.40 based on 35% discount to its property RNAV post rights issuance, reinvestment of shares and placement. Our applied RNAV discount is at a premium against the average discount applied on small-mid cap developers of 47% due to SUNSURIA’s; (i) reputable management team, (ii) light balance sheet, which will be instrumental in funding future landbanking, (iii) attractive land costs, which result in decent margins (iv) strong earnings growth from the newly injected assets, and (v) solid position in Klang Valley targeting largely township/landed properties. Our Ex-all FV provides a 28.4% share price upside to its TEAP last price of RM1.09 (last price: RM1.94). Our FV implies FY16-17E core PERs of 22.0x-7.7x (current: 17.0x-5.9x). Note that our estimates/valuations assume post rights, placement and reinvestment shares scenario. 

Source: Kenanga Research - 9 Jun 2015