KEY INVESTMENT HIGHLIGHTS

• Disposing the Pinnacle Sunway to Sunway REIT

• Proceeds from disposal earmarked for repayment of borrowings

• Expect net gain of RM40m from the disposal

• Earnings forecast maintained

• Upgrade to BUY with an unchanged TP of RM1.59

Disposing The Pinnacle Sunway to Sunway REIT. Sunway Berhad (SUNWAY) announced that Sunway Integrated Properties Sdn Bhd and Sunway Pinnacle Sdn Bhd, both of which are wholly-owned indirect subsidiaries of SUNWAY have entered into a conditional Sales and Purchase Agreement (SPA) for the disposal of The Pinnacle Sunway to Sunway REIT for a disposal consideration of RM450m. The Pinnacle Sunway is a 34-storey office building with occupancy rate of 100%. The proposed disposal is expected to be completed in 4Q2020.

Disposal to reduce net gearing. We are neutral on the proposed disposal as close to 100% of the proceeds from the proposed disposal will be utilized for repayment of borrowings. Hence, we do not expect any distribution for shareholders from the disposal. Earnings impact from the disposal is minimal as estimated interest savings of RM16.8m per annum only accounts for less than 3% of FY20 earnings forecast. Meanwhile, we estimate net gearing of SUNWAY to reduce to 0.46x from 0.51x post the disposal.

Earnings forecast maintained. SUNWAY is expected to record net gain of RM40m from the disposal as the disposal consideration of RM450m is higher than net book value of RM410m (as at 31 December 2019). Meanwhile, we make no changes to our earnings forecast for FY20/21F pending completion of the disposal.

Upgrade to BUY with an unchanged TP of RM1.59. We maintain our TP for SUNWAY at RM1.59, based on sum-of-parts valuation. Nevertheless, we upgrade SUNWAY to Buy from Neutral due to the attractive upside. Share price of SUNWAY declined by 10% in the past one month following the announcement of subdued earnings and rights issue. We think that the negatives were largely priced in and the share price weakness presents opportunity for investors to accumulate

Source: MIDF Research - 30 Jun 2020