Sunway Bhd
(March 30, RM3.68)
Maintain buy call with a higher fair value of RM3.95: We maintain “buy” on Sunway, with a higher fair value of RM3.95 per share (against RM3.60 per share previously), based on a 20% discount to our upwards revised sum-of-parts (SoP) value of RM4.93 per share. We have incorporated additional investment properties to the SoP, including the recently completed RM340 million (market value) Sunway Pinnacle, which sits next to the Sunway headquarters in Bandar Sunway, Selangor. We understand the Pinnacle (mainly offices) is currently above 50% occupied and it should rise to 75% by year-end.

For forecast financial year ending December (FY15F), Sunway is targeting launches worth RM2 billion (effective RM1.5 billion), with prospective sales of RM1.7 billion (effective RM1.2 billion). Its effective unbilled sales as at end-December last year amounted to RM1.9 billion — 1.6 times FY14 property sales. We expect property revenue to grow by about 9% for each of the next two years to RM1.3 billion and RM1.4 billion respectively (against RM1.2 billion in FY14).

Apart from external jobs, its subsidiary Sunway Construction Group (SunCon), which will be listed early in the second half of calendar year 2015, will benefit from the parent’s steady flow of property projects that have a combined potential gross development value (GDV) of about RM50 billion.  SunCon is reportedly among six parties shortlisted for the project delivery partner role for the RM9 billion Klang Valley light rail transit line 3.

As at end-December 2014, SunCon’s outstanding order book totalled RM3.06 billion, including RM1.93 billion external jobs. SunCon is targeting RM2.5 billion worth of job replenishment for FY15F against RM1.1 billion secured in FY14. We are assuming a renewal of RM2.2 billion for FY15F and RM1.8 billion per year for FY16F to FY17F. We maintain our FY15F and FY16F earnings (corporate tax rates at 20% and 24%, respectively against 15.3% for FY14).

At 90% to 95% of cash proceeds of RM390 million to RM445 million (at RM1.07 per SunCon share), the cash dividend could amount to 16 sen to 25 sen per Sunway share.  Pursuant to a dividend in specie, shareholders will also get one SunCon share for every 10 Sunway shares held. At the current price, the share and cash dividend could yield 7% to 10%.

Significantly, the listing of SunCon will bring about greater clarity of the internal jobs provided by SunCon to Sunway. Sunway’s recurring income from its investment properties can partly cushion shortfalls from development in the event of a drastic downturn. — AmResearch, March 30

This article first appeared in The Edge Financial Daily, on March 31, 2015.