We are encouraged with SUNWAY’s move in disposing their assets to SUNREIT for RM550.0m, as it allows them to realise their investment for other working capital and future capital expenditure needs. Tweaked FY19E NP higher by 7%, but no changes to FY18-19E CNP. Upgrade to OUTPERFORM (from MARKET PERFORM) with an unchanged SoP-driven Target Price of RM1.50.

News. On Monday, SUNWAY announced that they are be disposing 3 parcels of land along with its buildings in Bandar Sunway to SUNREIT for a total consideration of RM550.0m. The acquisition entails 3 parcels of leasehold land together with buildings comprising of a 5-storey academic block along with a lower ground level (South Building), a 6- storey academic block along with a lower ground level (North Building), a 13-storey academic block together with a 2-storey basement car park (New University Block), 4 blocks of 5-storey walk up hostel apartment (Hostel) and sports facilities.

Constructive move. We are not surprised on SUNWAY’s move on the disposal of assets in Bandar Sunway to SUNREIT as it always been is part of their strategy, as they are able to maximise the operating synergies while allowing SUNWAY to de-gear for future investment. We opine that SUNWAY’s de-gearing move to be constructive as it allows them to keep their net gearing levels at a comfortable level i.e. below 0.5x to fund its future investment properties i.e. medical centre. To recap, SUNWAY have several medical centres that are currently under construction, expected to complete by mid-2019 and end-2020. The disposal would bring its 3Q18 net gearing of 0.46x down to 0.39x.

Outlook. Recently, management revised their launch target higher to RM2.1b from their initial target of RM2.0b. The latest launch would be its Sunway Velocity 2 (GDV: RM320.m), which construction works was recently awarded to SUNCON. To recap, its Singapore project, i.e. Rivercove, received full take-up upon its launch in April 2018, while its local projects, i.e. Geolake and Citrine Lakehome, sales and bookings are currently recorded at 60-80%. Property unbilled sales of RM2.1b with 1-year visibility and a vigorous outstanding order-book of c.RM5.6b provide 2-3 years’ visibility.

No changes in earnings. Post disposal, we tweaked our FY19E NP higher by 7% after factoring in the net gain of disposal, but made no changes to our FY18-19E CNP as the disposal has no meaningful impact to our estimates, and no changes to our dividend expectations as we do not expect any special dividend to arise from this disposal.

Upgrade to OUTPERFORM, with unchanged Target Price of RM1.50, as we believe that SUNWAY are still able to deliver satisfactory earnings compared to other developers/contractors thanks to its well-diversified businesses. Our previous recommendation is MARKET PERFORM. Currently, we are comfortable with our valuations as follows; (i) applied property RNAV discount of 64% that is close to the sector average of 68%, (ii) premium valuation of 25.0x Fwd. PER to its healthcare division, and (iii) 11.0x FY19E PER to its construction division, highest multiple ascribed for the construction sector.

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 - 26 Dec 2018