Sunway Bhd
(Nov 14, RM3.27)
Upgrade to buy with an increased target price of RM3.72 from RM2.93: We recently met with Sunway Bhd’s management for updates on the progress of the proposed listing of its construction division.

Management reaffirmed plans to list Sunway Construction Group (SCG), the construction and pre-cast unit of Sunway Bhd. We were made to understand that the listing could be delayed from May to June 2015.

The bulk of proceeds from the listing would be returned to shareholders of Sunway via a one-for-10 dividend-in specie of SCG shares and special cash dividend which we estimate would amount to between one sen and 22 sen per share.

The remaining proceeds would be utilised for working capital and listing expense.

We opine that the contribution of Sunway’s construction unit has not been fully appreciated due to Sunway being largely seen as a property play.

This is understandable as the property and real estate investment trust (REIT) units explain 70% of its earnings.

Evidently, Sunway’s share price had hardly reacted to positive news flow of its construction unit securing various mega infrastructure projects.

With the proposed SCG listing, we expect the market to ascribe better value to Sunway’s construction assets as investors gain better insight into its capabilities, job secured and order book size.

Management indicated that SCG ranks third within the construction sector after IJM Corp Bhd and Gamuda Bhd in order book terms.

Its order book currently stands at RM3.2 billion (1.7 times financial year 2013 [FY13] construction revenue) of which only 15% are jobs from Sunway Group.

Management expects to secure another RM1.5 billion worth of external projects by end- 2014 which could easily provide another one to two years of earnings visibility.

We expect earnings for the construction division to grow by 11.4% in FY15 to RM110.2 million. Ascribing a low-end price-earnings ratio (PER) of 15 times for large-cap construction companies, we estimate SCG could potentially be worth RM1.28 per share.

Property sales have been encouraging so far with the company already locking in 48% of its financial FY14 sales target of RM1.3 billion.

We believe the strength of the property division is attributed to its strong track record which is underpinned by attractive projects that are benefiting from existing as well as future public transport connectivity nodes.

While the property division’s considerable exposure to Iskandar might pose a concern, we believe Sunway’s sound development plans and the strategic location of its projects could weather the softening property market.

Some notable features of its Iskandar project are ease of access to the proposed Coastal Highway Southern Link (CHSL), close proximity to two international airports in Senai, Johor and Changi, Singapore, and close proximity to two major international ports — Tanjung Pelepas Port in Johor and Jurong Port in Singapore.

Despite the potential overhang in the property sector after the removal of the developer interest bearing scheme (DIBS), the impact on property sales has been minimal thus far and this, according to management, is due to the property products being positioned at a premium to the market price which attracts serious buyers and/or property investors with a long-term horizon.

SCG could also benefit from the proposed CHSL. It participated in the tendering process and management is confident of securing the job for the construction of the stretch that links to the Second Link Expressway.

Apart from Sunway Iskandar’s strategic location, which provides a good selling point, the property unit could also benefit from revaluation gains of its assets.

Management views Sunway’s current net gearing of 0.3 times as healthy and the ratio is expected to remain unchanged after the relisting of SCG.

While the property investment unit would continue to require capital injection to expand its portfolio, management intends to keep its net gearing at no more than 0.5 times.

We believe the completion of Sunway Pyramid 3, Sunway University New Academic Block and Sunway Velocity Shopping Mall in 2015 could further strengthen the recurring income base for the property investment unit while retaining the group’s net gearing at a comfortable level.

We make no changes to our FY14 and FY15 estimates as we reckon the company’s earnings prospects are still on track to achieve our earnings forecasts.

In our view, the stock currently trades at undemanding multiples of 10.7 times FY14 PER and 10.1 times FY15 PER.

Furthermore, the potential special dividend payout post SCG listing would further enhance returns on the stock.

We upgrade our recommendation on Sunway to “buy” with a revised target price of RM3.72 (from RM2.93).

We apply a 40% discount to the property unit’s revised net asset value to account for the risks from various property cooling measures in Malaysia. — MIDF Research, Nov 14.

This article first appeared in The Edge Financial Daily, on November 17, 2014.