We raise our fair value to RM3.50. Sunway’s equity call to raise RM1bn proceeds is crucial to sustain its long-term growth, mainly coming from the 1,770-acre Sunway Iskandar project given the powerful Singapore story. Meanwhile, the continued development of sizeable property assets will not only help driving the property development growth in the Klang Valley but also prolong the asset value unlocking angle.

The truth – immediate dilution. Sunway has proposed a 1-for-3 rights issue and ESOS of up to 15% share cap. Post exercise, excluding ESOS, Sunway’s share base will be enlarged to 2.15bn from the current 1.3bn (given the exercise price of RM2.80, we assume full exercise of the existing warrants prior to the rights issue as the warrants are already in-the-money). Earnings from FY14 onwards, and FD RNAV/share will therefore be diluted by 35% and 20% respectively.

The prospect – growth and stronger balance sheet. We think the fund-raising exercise is timely as the market is getting more convinced with the Iskandar growth story. Sunway’s confident venture into Iskandar is banking on the long-term growth in Johor coupled with the powerful spill-over from Singapore. Putting the immediate dilution aside, we like Sunway’s capital management as the equity call will substantially strengthen the balance sheet into a net cash position (from 45% net gearing), We believe the fund raising this round will last the company for at least 2-3 years. While the property development front will see the growth from Sunway Iskandar, the company is also nurturing its property assets well. The Velocity Mall, Pinnacle and Sunway Pyramid 3, which are currently under construction, are expected to prolong the asset recycle story. These assets could worth RM2.5-3bn.

Forecast. Unchanged. EPS will be adjusted post completion of rights issue in 4Q13.

Investment case. Given that Sunway is now also a good proxy for Iskandar play, in tandem with the sector upcycle, we narrow our RNAV discount to 25% (from 30%). Our fair value is raised to RM3.50 (RM2.82 ex-rights). Maintain Buy.

Source: RHB