Yesterday, SUNWAY announced the disposal of Sunway Clio Property to SUNREIT for cash consideration of RM340.0m, and several other agreements. We are mildly positive as it gives room for SUNWAY to manage its balance sheet with a comfortable net gearing range of 0.5x. No changes to FY17-18E CNPs but raised FY17E NP after factoring in the disposal gains. Maintain MARKET PERFORM with a higher SoP-driven Cum/Ex-TP of RM4.25/RM1.82.

News. Yesterday, SUNWAY made an announcement in relation to: (i) the disposal of Sunway Clio Property to SUNREIT for a cash consideration of RM340.0m, (ii) lease back of Sunway Clio Property from SUNREIT, and (iii) proposed tenancy agreement of the multi- storey car park in Sunway Clio Property. The entire exercise is expected to complete in 4Q17.

Salient terms. Sunway to dispose of Sunway Clio Property at RM340.0m followed with a proposed lease of the hotel for the next 10 years based on the following terms; (i) minimum rent of RM10.9m for year 1 and 2, and RM8.2m for year 3 to 10, and (ii) variable rent which is 20% of Gross Operating Revenue + 70% of Net Operating Profit. That said, they also came up with a conditional car park tenancy agreement with SUNREIT with the following terms; 20% of Gross Operating Revenue (GOR) + 95% of Gross Operating Profit (Payable monthly).

More to disposal ahead? While it has always been SUNWAY’s plan to dispose its investment property assets to SUNREIT, the disposal took us by surprise as we did not anticipate any disposal of assets for this year. We are rather positive with the move as it lightens its balance sheet leaving them more room for land banking activities in the medium term while we expect its net gearing to hover closer to 0.5x. With its first asset disposal of the year, we do not rule out the possibilities of more asset disposal exercise in the pipeline, i.e. Sunway Pinnacle (NBV: RM340.0m) which have reached an occupancy rate of 95% in the beginning of the year.

Outlook. This has been an interesting year for SUNWAY, full of corporate exercises which we believe will continue till year end. Hence, we believe that there could be more land banking deals in the pipeline despite having replenished GDV of RM5.0b and we also do not rule out further asset disposal. 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 have 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. There are no changes to our FY17-18E Core Net Profits as the contribution from its hotel is minimal. That said, we raised our FY17E Net Profit by 6% to RM551.8m after we factor in the disposal gain of RM29.4m.

MARKET PERFORM maintained. We maintain our MARKET PERFORM call on SUNWAY due to its unexciting sales trajectory. However, we raised our SoP-driven Cum/Ex-TP of RM4.25/RM1.82 (previously, RM4.22/RM1.81) after factoring in a higher Target Price of RM1.90 for SUNREIT in accordance with the upgrade by our REIT analyst.

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

Source: Kenanga Research - 04 Aug 2017