SUNWAY has entered into an agreement with Penang Development Corporation (PDC) to develop an industrial park in Batu Kawan, Penang. We view positively the deal given the land’s strategic location and favourable valuations. We maintain our forecasts as the project will not contribute within our forecast period. We also keep our TP of RM 2.27 and OUTPERFORM call.

SUNWAY, via 70%-owned Umech Land Sdn Bhd (Umech), has entered into an agreement with PDC to develop a 559 acres land in Batu Kawan, Penang into an industrial park. PDC, being the owner of the land, will provide the land, while Umech as the developer will independently fund and manage the industrial park development. In return, Sunway and Umech are providing PDC with a land entitlement of RM646m. This will be done via deferred payment over four years through internally generated funds and debt, although the exact proportion is unknown at this juncture. The project is expected to have a GDV of RM3.5b with an 8-year development period, with an expected launch in early 2025.

Strategically located. We are positive on the latest development as it expands SUNWAY’s presence in the growing industrial development in Penang. Additionally, the project is strategically located around 4km from the Second Penang Bridge and close to existing industrial parks such as Bandar Cassia Technology Park, Valdor Industrial Park and Batu Kawan Industrial Park 1 (BKIP 1).

The price tag of RM646m translating to about RM27 per sq ft is lower than the asking price of RM35 per sq ft for large land tracts in the area. In addition, it will be paid in instalments over four years (which means the NPV of the price tag is even lower). We think SUNWAY is getting a good deal here.

Forecasts. Maintained as its launch only likely to take place in FY25 which is beyond our forecast period.

Maintain OUTPERFORM with SoP-TP of RM 2.27. We had applied 55% discount to RNAV for SUNWAY’s property development segment (in line with industry peers) as we reckon sentiment may pick up in the sector from higher interest in the space thanks to ongoing infrastructure projects. Besides this, the group’s property development and healthcare segments remain as major contributors to SUNWAY’s overall valuations.

We continue to like SUNWAY for: (i) its healthy pipeline of medical centres located within brownfield townships, (ii) quick turnaround model for its property development arm, and (iii) a diversified range of investment assets which provides stable earnings base. We opine that its strong brand equity could also enable demand for the group’s products and services to be sustained. There is no adjustment to our TP based on ESF given a 3-star rating as appraised by us.

Risks to our call include: (i) a prolonged slowdown in the property, hospitality, and MICE sectors, (ii) rising mortgage rates eroding affordability, and (iii) changes to urban development policies in the Klang Valley. While our outlook remains positive, the industrial space may face challenges by slowing GDP, resulting to lower demand for industrial developments.

Source: Kenanga Research - 29 Sept 2023