Last Friday, SUNWAY announced a land bank replenishment exercise, through a JV structure that injects fresh GDV of RM2.0b to its Klang Valley development and raising total GDV to RM13.1b. We are neutral on the land deal as impact to its RNAV is minimal. No changes to our FY16-17E earnings, MARKET PERFORM call and Sum-of-Parts driven TP of RM3.23.

News. Last Friday, SUNWAY announced that they have entered into a joint-venture agreement with Low Peng Kiat (LPK), CRSC Property SdnBhd (CRSC) and Austral Meridian Property SdnBhd (AMP) which after subscription of shares by SUNWAY, the shareholdings in AMP would be as follows:- SUNWAY (50%+1share) with a put option from sellers where Sunway may own up to 70% in 8 years? time, LPK (40%), and CRSC (10%). Subsequently, AMP will undertake the development (GDV RM2.0b) of the parcel of land measuring 8.45acres along Jalan Peel right opposite Sunway Velocity.

First landbank in 2017. We were not entirely surprised with the land deal as management has always been on the outlook for new landbanks especially in the Klang Valley to diversify from its geographical risk in the Southern region. Based on management?s explanation, should they acquire up to 70% in AMP, SUNWAY is required to fork out RM281.2m in total, which works out to be RM1,091psf while management?s cost psf is lower at RM886psf (refer overleaf for more details). Based on our derived acquisition cost of RM1,091psf, it represents a premium of 24% over Ibraco?s land deal in Jalan Yew back in March2015, which was transacted at RM877psf, and a land cost to GDV ratio of 20%, which is considerably on the steep side. Impact to net gearing to be minimal which is expected to increase to 0.43x from its 0.41x in 3Q16.

Maintain FY16-17 earnings. We make no changes to our FY16- 17E earnings estimates of RM485.0-490.0m, as the potential contribution from the project would only commence earliest by FY18 onwards.

Outlook. Overall, we are neutral with the land deal despite being at a premium, given that landbank in such prime location is difficult to come by while the project is a natural extension of its TOD-driven Velocity. This particular development is expected to be launched in 1H18 and development to take place over the next 10years. That said, we are still confident with SUNWAY?s ability in delivering sturdy performance for the year premised on its strong unbilled sales of RM1.8b with 2-year visibility, a robust outstanding order book of RM4.8b that provides 2-3 years? visibility and other divisions that has been generating decent growth over the years.

MARKET PERFORM. No changes to our MARKET PERFORM recommendation and SoP-driven Target Price of RM3.23 even after inputting the land deal into our property RNAV, which raised 1.0sen to our TP, as it was offset by a lower valuation in SUNREIT, which we have just updated. We are still maintaining our cautious view on the property market as we have yet to see much improvement in the market, especially bank loan approvals.

Downside risks to our call include: Weaker-than-expected property sales and construction order book replenishment, Higher- than-expected sales and administrative costs, negative real estate policies, and tighter lending environment.

Source: Kenanga Research - 13 Feb 2017