Yesterday, SUNWAY entered into two land deals in i) Kajang measuring 5.3acres at RM63.0m and ii) USJ 1 measuring 14.8acres at RM167.6m with a combined estimated GDV of RM1.9b which we are positive given its strategic location. No changes to our FY17-18E earnings. Maintain MARKET PERFORM with a higher SoP-driven Cum/Ex-TP of RM4.22/RM1.81 (previously, RM3.87/RM1.66).

News. Yesterday, SUNWAY announced that they entered into two land deals of which they are acquiring freehold lands measuring 5.3acres in Kajang and 14.8acres in USJ 1 Subang Jaya for a purchase price of RM63.0m and RM167.6m, respectively. The purchase price for its Kajang and USJ 1 land translates to RM274psf and RM260psf, respectively.

Shopping mode! To date, SUNWAY has entered into four land deals bringing its year-to-date GDV replenishment up to RM5.0b with its existing GDV now stands at RM53.5b. We deem that the purchase price for both of its landbank to be fair as it represents a land cost to GDV ratio of 13% and 11% for Kajang and USJ 1, respectively. In terms of pricing per square feet, the asking price for the surrounding land around its Kajang land ranges between RM210-250psf, which is close to their purchase price given that it comes with a completed structure with car park podium that is viable to be converted into SOHOs, coupled that it is a Transit Oriented Development. That said, it allows SUNWAY to enjoy a speedier billings cycle upon launch. As for its USJ 1 land, we believe that they secured a good bargain from JAKS as RM260psf for an industrial land, while the asking price in the surrounding area ranges between RM330-380psf for commercial land which we believe SUNWAY would be able to convert the land for commercial purposes at a lower rate as compared to the asking prices above. Furthermore, it is located just a throw stone away from local amenities and public transport like Da Men Mall, Summit USJ, and South Quay BRT station.

Outlook. While SUNWAY has already replenished GDV of RM5.0b for the year, we believe that there could be more landbanking deals in the pipeline. In terms of earnings delivery, we remain confident with SUNWAY’s ability to deliver for the year premised on its strong unbilled sales of RM1.4b with 2-year visibility, a robust outstanding order book of RM4.6b that provides 2-3 year visibility and other divisions that has been generating decent growth over the years. However, we are still tracking its sales closely, as its 1Q17 sales of RM142.0m are still below our and management’s target of RM1.1b. In five years’ time, we expect management to consider the option of spinning off its medical division.

Earnings unchanged. No changes to our FY17-18E core earnings as we did not factor in the potential earnings contribution from these particular projects as we are expecting the earliest launches from these two landbanks to take place from 2H18 onwards.

MARKET PERFORM maintained. We reiterate our MARKET PERFORM call on SUNWAY due to its unexciting sales trajectory but with a higher SoP-driven Cum/Ex-TP of RM4.22/RM1.81 (previously, RM3.87/RM1.66) after we did some housekeeping on our model, which includes an additional RM2.0b worth of GDV replenishment assumptions coupled with a narrower discount to RNAV of 52% (previously, 55%) inline with our sector average.

Downside risks include: Weaker-than-expected property sales and construction replenishment, higher than expected admin costs, negative real estate policies, and tighter lending environment.

Source: Kenanga Research - 2 Aug 2017