Edge Weekly: Asset injection for Sunsuria delayed to 1Q 2015

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SUNSURIA BHD’S decision to proceed with its rights issue exercise despite the deferment of asset injection has taken the market by surprise, but its executive chairman and substantial shareholder Datuk Ter Leong Yap says there is no cause for concern.

Ter, who has a 50.12% stake in the company (formerly known as Malaysian Aica Bhd), says he has no second thoughts about injecting his private assets as initially planned. The company still plans to acquire the relevant assets, but will now do so in the first quarter of 2015.

“The commitment to inject the assets remains. It is just delayed till early next year. Apart from the timing, nothing has changed,” Ter tells The Edge.

On June 18, the company announced that it has let its heads of agreement (HoA) lapse to enable it to have more time and flexibility to assess the proposed and other potential acquisitions.

This raises questions over Ter’s plans to inject the assets identified in the HoA and whether the deferment was due to any regulatory issue.

“Being a newcomer, Sunsuria needs to build a track record as a PLC (public listed company) for at least another few quarters. Sunsuria’s business direction changed to property development only last financial year ended March 31, 2014, hence, this management decision is appropriate and prudent,” says a source.

Indeed, although Sunsuria has been around for two decades, it has yet to be a household name. Nonetheless, to its credit, it has launched properties worth over RM2 billion in the past four years.

Sunsuria’s team has a combined 90 years of experience in property development. It includes Wong Yuen Teck, Koong Wai Seng and CEO Ho Hon Sang.

Koong was previously the chief financial officer and group finance director of Sunway Group. He was also former executive director of Tropicana Corp Bhd.

Ho was previously the managing director of Sunway Bhd’s property development division and has more than 15 years of experience in the industry.

Ter built up his 50.12% stake in the company following the acquisition of a substantial interest from previous major shareholder Tan Sri Robert Tan, and launching a takeover of the group.  

Sunsuria’s assets to be injected include its 50% interest in Xiamen University campus, 75% of its Medini Iskandar project, 81% interest in 7th Avenue 2 development in Setia Alam, Selangor, and bungalows in Bukit Raja, Selangor.

So far, two assets injected into Sunsuria by Ter were Trivo and Suria Residence in Selangor. To date, Trivo is 39% completed while Suria Residence is targeted to be launched by the third quarter of this year.

“Ter will never demand for unfair pricing for his private assets, which can undermine the performance of Sunsuria,” says the source.

Still, it is puzzling that the company is proceeding with the rights issue exercise despite the asset injection being delayed by another six months. Sunsuria claims that the move is to avail itself of funding as and when opportunities arise.

In response, Sunsuria’s share price fell 11 sen or 7.69% to close at RM1.32 the day the announcement was made.

Under the exercise, Sunsuria plans to raise between RM184.50 million and RM356.31 million from the rights issue and share placement. The indicative issue prices of the rights share and placement share were 65 sen and 75 sen respectively.

The company has proposed a renounceable rights issue of up to 475.08 million new shares on a three-for-one basis with 158.36 million free detachable warrants on a one-for-three basis.

The bulk of the proceeds would go towards property development and land acquisition.

Sources say Sunsuria is finalising terms with underwriters, who are expected to take up about half of the rights issuance valued at some RM200 million. Ter himself has committed to undertake his entire entitlement.

“The idea is for the rights issue to be done separately from the injection. This will ensure that the company is sufficiently capitalised before undertaking any large-scale acquisitions,” says a source.

Post-rights issuance, the company’s net gearing will be 0.16 times, healthy enough for more future landbanking.

To recap, Ter, through his private vehicle TER Equity Sdn Bhd, launched a mandatory takeover offer of Sunsuria on Jan 22 at 85 sen per share. Ter, who is the executive chairman of Sunsuria, has been appointed executive director of the company, effective Jan 22.

Maybank Investment Bank says at 85 sen per share, Sunsuria will be valued at an annualised price-earnings ratio (PER) of 74.6 times and price-to-book value (PBV) of 1.55 times. This compares against Eco World Development Sdn Bhd’s mandatory general offer price for Focal Aim Holdings Bhd of RM1.40 and its valuations of 14.6 times PER and 1.1 PBV respectively.

Even though Sunsuria shares may appear pricey, based on FY2015 earnings, it is trading at PER of 10 times as earnings grow with contributions from its property division, according to UOB Kay Hian estimates.

The brokerage house says by securing a substantial stake in the prized landbank, Sunsuria shareholders can enjoy the upside in development profits.

“A ballpark calculation of Sunsuria’s RNAV (revised net asset value) comes up with in excess of RM944 million versus current land value of RM224 million, which implies a potential value enhancement of RM720 million,” it said.

Kenanga Research has estimated a potential gross development value of at least RM8 billion for Sunsuria.

It assumes Sunsuria’s property project starts selling by the end of financial year 2014, ended March 31, to early FY2015, and hence, contributions will start flowing in from FY2015. It estimates FY2014 and FY2015 net profits at RM1.3 million and RM2.5 million respectively.

This would certainly be a boost to Sunsuria’s bottom line, which stood at a mere RM1 million for FY2013.

So far, things are looking up for Sunsuria with contributions from the property business. Sunsuria reported 4QFY2014 revenue of RM22.5 million, up 100% y-o-y and net profit of RM2.3 million, up 67% y-o-y. Its FY2014 net profit was RM3.6 million, up 100% y-o-y, boosted by the property development and wooden door manufacturing businesses.

With the target to grow Sunsuria into at least a RM500 million property developer in terms of market capitalisation, all eyes will be on Ter’s plans for the funds raised from the cash call exercise.

This article first appeared in The Edge Malaysia Weekly, on June 23 - June 29, 2014.