Buys Sterling Paradise for RM15mn

Sunway is buying 100% equity stake in Sterling Paradise S/B (Sterling) for RM15mn. The acquisition of Sterling is expected to be completed by 4Q19. Note that Sterling had previously signed a Sales and Purchase agreement with Meraki Land S/B to acquire 47 parcels of land measuring approximately 11.8 acres freehold land in Mutiara Bukit Jalil for a mixed-used development. The acquisition of the land is currently pending completion.

Strategic Location

The land sits in the matured neighbourhood of Bukit Jalil with plenty of catalytic developments, such as the National Sports Complex and the 18-hole Bukit Jalil Golf & Country Resort. The entry of higher education institutions, such as the International Medical University and Asia Pacific University of Technology and Innovation would also turn Bukit Jalil into one of the most sought-after neighbourhoods. Furthermore, the land is near the 80-acre Bukit Jalil Park and the new Pavillion Bukit Jalil Mall that is being developed. The land has easy access to major highways namely Bukit Jalil Highway and Kesas Highway. In terms of public transportation, the land is about 600m and 900m from Muhhibbah LRT and Alam Sutera LRT Stations respectively.

RM800mn GDV Mixed Development

Management guided that the land is slated for a mixed development with an estimated GDV of RM800mn, based on an approved development order (64% Residential: 36% Commercial). Scheduled for launch in 2H2020, the project is expected to be completed within a 6-year development period.

Land Purchase Consideration

We understand that Sterling had secured the land on relatively favourable terms, at a purchase consideration of 15% of the gross development value (GDV) of the future development less a fixed sum of RM36.7mn. Upon completion of the project, Meraki Land S/B will be entitled to 25% of PBT less a fixed sum of RM145mn.

Our View

This marks the group’s 4th land acquisition for this year – see Figure 2. With this acquisition, Sunway has replenished RM4.5bn worth of GDV this year, boosting the group’s total landbank to 3,356 acres with a total potential GDV of RM56.6bn (effective RM39.3bn).

In terms of land cost, the implied land price is circa RM196psf or 13% of the estimated GDV. The land cost to GDV ratio comfortably falls within the typical range of 10-20%, which we believe is fair. In addition, the land is acquired with an approved development order, thus enabling the group to launch the project as soon as second half of next year.

Overall, 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.

Impact

No change to our FY19-21 earnings for now pending the completion of the acquisition.

Valuation

We think Sunway deserves higher valuation multiple given its: 1) diversified and resilient earnings base (core earnings breakdown: property development: 24%, property investment: 27%, construction: 14% and others: 35%); 2) strong balance sheet with net gearing ratio of 0.3x, 3) above sector average ROE of >7% vs other big-cap peers of 4% and 4) attractive dividend yields of c.5%. As such, we ascribe a higher target P/E of 14x on CY20 EPS (from 12x previously).

We arrive at a new target price of RM1.78/share (from RM1.65/share previously), based on a higher target average blended CY20 PE/PB of 14x/0.9x (previous CY20 PE/PB of 12x/0.9x). With a potential total return of 10%, we maintain our Hold recommendation on Sunway.

Source: TA Research - 23 Sept 2019