Initiating coverage on SUNSURIA with an OUTPERFORM recommendation and TP of RM1.50 based on a valuation of 41% to its FD SoP of RM2.52. We like the company for its management team, healthy margins, light balance sheet, strong new sales and earnings growth mainly spearheaded by Sunsuria City, which enjoys catalysts such as the ERL station and Xiamen University. Estimating strong FY17-18E sales growth of 94%-25% YoY while earnings normalization results in core earnings leaping by 167%-60% YoY.

Strong management with the ability to forge strong business ties. Datuk Ter Leong Yap, the founder and executive chairman, has over 25 years of experience in property development. He holds several distinguished positions, including the President of The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM).

Remaining total GDV of RM10.6b which provides 6-8 years’ visibility. Their landbanks are all in freehold status within the Klang Valley. Sunsuria City@Salak Tinggi is the main growth driver being the 91% contributor of remaining total GDV. They enjoy attractive land cost, which allows for strong gross project margins of 40%-45% due to its relatively low land-cost to GDV ratio of 8%.

ERL station Transit Oriented Development (TOD) and Xiamen University Malaysia (XUM) are population catalysts for Sunsuria CIty. The project has a direct link to the Salak Tinggi ERL station with plans for a lifestyle hub TOD. The ERL (KL Sentral to KLIA) has plans to increase capacity by 50% indicating strong usage of the ERL line. XUM, a G2G project and owned by the Government of China, is at the heart of Sunsuria City and is the first overseas campus of a Chinese university. The fast-track project started enrolment in Feb 2016 with 1,450 students and a target of 10,000 students in 5-6 years’ time.

Ramping up new launches to RM1.57b-RM1.74b over FY17-18E as major approvals have been secured, mainly from Sunsuria City. Notably, the bulk of these launches are affordable or mid-market residential priced below RM500k/unit (27%) and RM500-700k/unit (30%) while the commercial products (33%) are mainly shop offices/integrated commercial/retail space. Sunsuria City’s Bell Avenue retail shops/Jasper shops have garnered decent take-ups of 73% collectively at end FY16.

Earnings have yet to normalize with an inflection point in FY17-18 as maiden contributions from drivers like Sunsuria City/The Forum was only significant from FY16. Given the challenging property market, we have assumed conservative FY17-18E take-ups of 50%-60% or sales of RM0.89b-RM1.1b (94%-25% YoY growth) with earnings growth of 167%- 60%. This is the highest growth rate under our coverage given its starting low base. ROEs are expanding and will likely exceed 20% in FY19, which is stronger than its peers. Given the earnings leap, we expect SUNSURIA to commence dividend pay-outs (FY17-18E yields of 2.6%-4.1%). FY17E net gearing is light at 0.14x with expectations of aggressive landbanking while we expect more partnerships (e.g. Welcome Global) to materialize.

Initiating coverage with a TP of RM1.50 based on 41% SoP discount to its FD SoP of RM2.52. The applied discount is within our small-mid cap developers’ range of 25%-86%. Our TP implies a 2-year average 9.9x Fwd PER vs. small-mid cap’s 8.3x which we think is justifiable considering that earnings normalization will be over the next 2-3 years as its average 2-year forward earnings growth is 114% vs. small-mid cap peer average of 6%. OUTPERFORM.

Source: Kenanga Research - 14 Feb 2017