• Disposing Sunway Clio to Sunway REIT

• Disposal gain of RM29.4m

• Proceed of disposal to reduce net gearing

• Marginal impact on earnings

• Maintain Neutral with an unchanged TP of RM4.25

Disposing Sunway Clio to Sunway REIT. Sunway Berhad (Sunway) announced that it has entered into a sale and purchase agreement to dispose Sunway Clio to Sunway REIT for RM340m. Sunway has also entered into hotel lease agreement with Sunway REIT to lease back Sunway Clio for an initial term of 10 years. The asset disposal is expected to complete in 4QFY17.

Disposal gain of RM29.4m. Sunway Clio is located within the township of Sunway City, in close proximity to Sunway Resort Hotel & Spa. Sunway Resort City. Sunway Clio is a 19-storey 4-star rated hotel with 401 rooms. Besides, Sunway Clio is also having 88,384 sq ft of retail space. Construction of Sunway Clio was completed on 12 February 2016 with estimated total development cost at RM303.2m. Sunway is expected to recognize disposal gain of RM29.4m from the disposal.

Proceed of disposal to reduce net gearing. We are positive on the disposal as we think that the disposal is timely to help bringing down net gearing of Sunway. Net gearing of Sunway is expected to climb above 0.54x from 0.47x in 2QFY17 following a slew of land acquisitions earlier this year with total purchase consideration of >RM500m. Sunway intends to utilise RM275m or 81% of proceed from disposal for repayment of borrowings. We estimate net gearing of Sunway to be contained at around 0.5x post disposal of Sunway Clio.

Minimal impact on earnings. Core earnings impact from the disposal is minimal. We estimate interest cost saving of around RM13m to be largely offset by lease payment for Sunway Clio. Overall, we raised our net income forecast for FY18 by 4.9% after taking into account disposal gain of RM29.4m. Nevertheless, our core net income estimates remained unchanged as we treat fair value gain as one-off item.

Maintain Neutral with an unchanged TP of RM4.25. We maintain our target price for Sunway at RM4.25, based on sum-of-parts valuation.

Source: MIDF Research - 4 Aug 2017