Expanding Industrial Development Portfolio to Penang

Sunway’s 70% owned subsidiary, Umech Land S/B, has entered into a joint development agreement with Penang Development Corp (PDC) for a 559-acre leasehold industrial land in Batu Kawan, Penang. In exchange for the development rights, PDC will receive an entitlement worth RM646.0mn, with RM64.6mn upfront and the remainder in four instalments over four years.

Strategic Location

The land's strategic location, approximately 4km from the Penang Second Bridge, offers excellent connectivity – see Appendix 1. It is conveniently situated just a 20-minute drive from Penang Island and a 30-minute drive from Penang Port. This prime location makes it an ideal site for the proposed Industrial Park, complementing the existing industrial areas in the Batu Kawan region, including Batu Kawan Industrial Park 1 and Valdor Industrial Park – see Appendix 2.

RM3.5bn GDV Industrial Park

According to management, the joint project, named Batu Kawan Industrial Park 2 (BKIP 2) is earmarked for the development of an industrial park, comprising factories, industrial lots, and commercial components. The development of BKIP 2 is anticipated to span over eight years and is expected to yield a potential total GDV of at least RM3.5bn. Sunway aims to launch the development in early-2025.

Our View

The total payment of RM646mn to PDC corresponds to an effective land price of RM26.50psf. This price is notably lower than recent transactions in Batu Kawan Industrial Park, which have ranged from RM50 to RM55psf, as outlined in Appendix 3. However, we note that they are not directly comparable as Sunway is acquiring a larger piece of land, while recent transactions in the same area have typically involved smaller plots ranging from 2 to 14 acres in size. Overall, we consider the land acquisition price to be reasonable given that the land cost to GDV ratio of 18.5% comfortably falls within the typical range of 10- 20%.

We are optimistic about the proposed investment as it aligns with Sunway's expanding industrial development portfolio. This marks Sunway's second foray into industrial development this year, following the purchase of 245 acres in Rawang for RM115mn, intended for an industrial tech park with a GDV of RM2.0bn, which was announced last month.

We believe that Sunway’s decision to expand into Batu Kawan is strategic. The future outlook for Batu Kawan is promising due to several factors, including its comprehensive master plan, advantageous geographic positioning at the southern tip of Penang, and its close proximity to the second Penang bridge. The primary drivers of economic growth in Batu Kawan will remain industrial activities, which are expected to foster population and employment growth.

Specifically, this expansion is poised to benefit from the semiconductor and semiconductor-related industries, as well as the production of wafer fabrication equipment and critical subsystems. Additionally, the rise of 5G technology, automotive electronics, and advancements in medical technology further contribute to the positive long-term prospects of Batu Kawan.

Impact

Sunway plans to finance this investment using a combination of internal funds and borrowings. We anticipate a limited impact on the balance sheet, considering Sunway's substantial cash reserves of RM2.1bn as of 2Q23 and the favourable payment terms spanning four years. Since the project is set to launch in 2025, we expect a significant earnings contribution to begin from FY26 onwards. Therefore, we maintain our earnings forecasts for FY23-25.

Valuation

We maintain our Buy recommendation with an unchanged target price of RM2.40, based on SOP valuation.

Source: TA Research - 29 Sept 2023