Proposed JV Development in Jalan Peel Cheras

Sunway has entered into a subscription and shareholders’ agreement (SSA) with Low Peng Kiat (LPK), CRSC Property S/B (CRSC) and Austral Meridian Property S/B (AMP) with intention of establishing a joint venture via AMP to jointly undertake an integrated development project on the parcels of leasehold land owned by AMP. The land measures approximately 8.45 acres is located in Jalan Peel, Cheras.

Salient terms of the agreement

Under the SSA, Sunway shall subscribe to 500,001 ordinary shares in AMP, representing 50%+ 1 share of the equity interest in AMP for a total consideration of RM500,001

Meanwhile, Sunway also entered into a Put Option Agreement (POA) with LPK and CRSC to outline the put option arrangements between the parties in the shares of AMP. Under the POA, LPK and CRSC have the right to require Sunway to purchase the option shares at the option price within the option period as stated below: • 1st Put Option on 10% of enlarged and paid-up capital of AMP shares exercisable 4 years after Sunway’s entry for RM91.35mn • 2nd Put Option on 10% of enlarged and paid-up capital of AMP shares exercisable 8 years after Sunway’s entry for RM91.35mn. In addition, Sunway will also advance up to RM140mn to settle the existing liabilities of AMP.

RM2.0bn Mixed-Development

The land is located along Jalan Peel and directly opposite the group’s on-going Sunway Velocity development – see Appendix 1 & 2. According to the announcement, the land will be developed into a mixed development, comprising serviced apartments, office towers and retail shops. To be developed over a span of approximately 10 years, the proposed development is expected to generate a potential GDV of RM2.0bn. First phase of the development is targeted for launch in 1H2018.

Implied land cost represents 16.3% of effective GDV

Assuming a discount rate of 6% and the put options will be fully exercised by the shareholders, the maximum net present value (NPV) of the purchase consideration amounts to RM228.2mn – see Figure 2. This implies land cost of approximately RM886psf based on a 70% effective stake in AMP. We believe

the acquisition cost is reasonable given that the land cost represents 16% of the effective GDV of RM1.4bn (70% of RM2.0bn). For comparison, we note that land parcels within Tun Razak Exchange (TRX), which is less than 5km away from Sunway Velocity or 1 MRT station away to Cochrane station, were sold for price ranging between RM2,800 and RM4,700psf. Meanwhile, if we compare Sunway’s acquisition price of RM886psf to RM877psf that Ibraco paid to acquire freehold land fronting Jalan Tun Razak and Jalan Loke Yew in Mar-15, the price tag appears fair.

Positive on the deal

The land will increase the group’s outstanding GDV by 4.1% to RM50.5bn (effective GDV: RM32.5bn) – see Figure 3. We are positive on the land acquisition as it will further expand the group’s land bank in the Klang Valley, which is also in line with its objective to replenish land bank in strategic locations and ready for launch over the near term. In addition, we believe the new development will have synergies with the existing Sunway Velocity development, which comprises several investment properties such as Sunway Velocity Shopping Mall, Sunway Velocity Medical Centre and Sunway Velocity Hotel. As the new development will comprise mainly residential components, this will provide the commercial components of Sunway Velocity with a bigger catchment population. We understand that link ways will be proposed to enable residents of the development to enjoy amenities at Sunway Velocity seamlessly.

Impact

No change to our FY16-18 earnings estimates for now, assuming the official launch in 2018 with progress billing to start from 2019 onwards.

Valuation

Taking into account the new target price for SunREIT, our target price is adjusted slightly to RM3.27/share (from RM3.26/share previously), which is pegged to a 10% discount to its SOP value of RM3.62/share. Maintain Hold.

Source: TA Research - 13 Feb 2017