SUNSURIA announced the proposed development, with Genlin Dev. Sdn Bhd (Genlin), on a 2.23ac freehold land in Sentul, Kuala Lumpur, and acquisition of the said land on a 70:30 basis with Genlin for a consideration of RM28m (RM19.6m based on 70% stake). We are slightly positive on the deal, but the impact is neutral to our RNAV as we have built in RM700m GDV replenishment. Maintain FY17-18E earnings. Maintain OUTPERFORM and TP of RM1.61.

Acquiring 2.23ac in Sentul, KL. Sunsuria’s 99%-owned direct subsidiary, Sunsuria Gateway Sdn Bhd (SGSB) has entered into a Shareholders Agreement (SHA) with Genlin to develop two pieces of freehold land measuring 2.23ac in Sentul, Kuala Lumpur via Goodwill Signature Sdn Bhd (JV Co), a 70:30 joint venture between SGSB and Genlin. Additionally, the JV Co entered into an SPA to acquire the said land from Genlin for a purchase consideration of RM28m (RM19.6m is SGSB’s portion), implying a price of RM288psf (refer overleaf). The acquisition will be funded by internally generated funds or bank borrowings, and is expected to be completed in 1QFY18.

We are slightly positive on the deal, but the impact is neutral to our RNAV estimate as we have built in RM700m GDV replenishment. We were not surprised as management had previously indicated that they are aggressively eyeing suitable land in the Greater Klang Valley region, while we do not expect any significant impact to SUNSURIA’s portfolio as the acquisition is fairly small. The project is slated to be a mixed development (i.e. serviced apartments and retail units), but project details are still scarce with management yet to guide on the finalised development plans and potential GDV. As such, we are assuming a conservative land cost to GDV ratio of 15% (vs. the Group’s land cost to GDV ratio of 8%) and estimate total project GDV to be RM187m (RM131m based on 70% stake), which makes up only 1% of SUNSURIA’s total remaining GDV of RM10.3b.

Outlook. SUNSURIA has launched Olive at Sunsuria City (GDV: RM284m) and Bell Suites (GDV: RM147m) in FY17, while we expect the Group to launch a total of RM1.57b in FY17, suggesting that most launches will be back loaded towards 2H17. The bulk of FY17-18 launches will be affordable high-rise or mid-market landed residential priced below RM700k/unit from Sunsuria City, a segment that is more readily digestible by the current market.

Maintain FY17-18E earnings of RM98-157m and sales of RM0.89- RM1.1b. The launch date is yet to be finalised, but we anticipate it could happen in end FY18 or FY19, and as such make no changes to our estimates. Going forward, FY17E net gearing will remain unchanged at 0.14x, while FY18E will increase marginally to 0.15x (from 0.13x). Due to its light balance sheet, we believe the Group will be able to aggressively land bank while we expect more partnerships (e.g. Welcome Global) to materialize. We expect SUNSURIA to commence dividend pay-outs in FY17-18E (2.1%-3.4% yields).

Maintain OUTPERFORM with a TP of RM1.61 based on 36% SoP discount to its FD SoP of RM2.52. We make no changes to our FD SoP RNAV as we previously built-in GDV replenishments of RM700m. Post this acquisition, we are building in RM513m GDV replenishment. The applied discount is within our small-mid cap developers’ range of 25-82%. Our TP implies a 2-year average 10.6x Fwd. PER vs. small mid cap’s 8.2x 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 7%.

Source: Kenanga Research - 27 Jul 2017