CONGLOMERATE SUNWAY BHD (SWB MK,SGWM.KL) 14 November 2011 Bigger but lacking re-rating catalysts Company report HOLD Nik Ikhwan Nik Mahmood (Initiation) [email protected] +603 2036 2299 Rationale for report: Initiation coverage Investment Highlights Price RM2.20 Fair Value RM2.50 We initiate coverage on Sunway Bhd with a HOLD rating at a fair 52-week High/Low RM2.80/RM1.67 value of RM2.50 /share, based on a 20% discount to our sum-of- Key Changes parts valuation of RM3.13/share. While we see value in the Fair value Initiation coverage company, we believe our HOLD rating is justified given the lack of EPS Initiation coverage near- to mid-term catalysts. YE to Dec FY10 FY11F FY12F FY13F Sunway is an integrated property and construction company with exposure to all types of real estate assets. The bulk of its earnings Revenue (RMmil) 3,134.5 3,507.7 3,897.6 4,448.0 comes from property development ~40%-45%, followed by rental Core net profit (RMmil) 325.0 310.6 354.5 439.1 EPS (Sen) n/a 24.0 27.4 34.0 income from its property investments and dividends from 37%- EPS growth (%) 0.0 14.1 23.9 owned Sunway REIT – accounting for 20%-25%. Consensus EPS (Sen) 315.5 363.9 415.4 DPS (Sen) n/a 0.0 0.1 0.1 While Sunway has a reputable construction arm, it only PE (x) n/a 9.6 8.4 6.8 contributes about 15% to the group’s total net profit due to tight EV/EBITDA (x) n/a 8.8 7.4 5.4 margins. The unit will be busy for the next few years with a current Div yield (%) 0.0 2.1 2.4 3.0 order book of RM2.4bil, comprising mostly building jobs. ROE (%) 0.0 10.7 10.9 11.9 Net Gearing (%) 56.4 50.2 38.6 16.5 The advantage of Sunway’s integrated business model is obvious Stock and Financial Data whereby it is able to recycle its capital via the monetisation of the investment properties. The associate stake in Sunway REIT Shares Outstanding (million) 1292.5 provides a ready platform for this purpose. This is the primary Market Cap (RMmil) 2964.9 catalyst for any re-rating. Book value (RM/share) 2.3 P/BV (x) 1.0 ROE (%) 11.6 However, among the assets in its portfolio, we believe Sunway Net Gearing (%) 50.2 Giza is deemed to be the most attractive for monetisation in the immediate term. Other assets in the pipeline include VeloCity mall Major Shareholders Tan Sri Jeffrey Cheah Corp (47.7%) and Sunway Pyramid 3 (combined NLA of 1.1mil sq ft), which are GIC (12.2%) only expected to be completed in the next two to three years. Free Float (%) 51.4 In any case, given the gestation period between the completion Avg Daily Value (RMmil) n/a and the maturity of the said assets, the unlocking of the assets Price performance 3mth 6mth 12mth may not materialise so soon. As such, we believe there is limited upside to the stock. Absolute (%) n/a n/a n/a Relative (%) n/a n/a n/a Plus, we are not too excited about the recent LRT job win given the ‘competitive’ margins due to the intense bids. However, we are upbeat that the group has been pre-qualified for the MRT packages despite having a limited rail job experience. MRT jobs should provide relatively better margins given the higher degree of set skills involved. Sunway’s annual order book target of RM1.5bil may be achievable given that a third of it is secured by jobs from its property unit. Apart from MRT, there are other major ETP and 10MP projects up for grabs, including highway jobs and integrated ‘iconic’ developments. Nonetheless, we expect Sunway to be selective in looking for new jobs as current contracts in hand will keep it occupied. But, its potential involvement in SCORE infrastructure may prove to be challenging. We estimate FY11F earnings at RM311mil with the property unit being the driver. We are expecting a growth of 14%-23% for FY12F-FY13F to RM355mil-RM439mil. While there is no clear dividend policy at this juncture, we assume a 20% payout ratio. PP 12247/06/2012 (030106) Sunway Bhd 14 November 2011 CHART 1: MERGER DETAILS Source: Sunway INITIATE SUNWAY BHD WITH A HOLD there would be free warrants in Newco on the basis of 1 Newco warrant for every five Newco shares. We initiate coverage on Sunway Bhd with a HOLD rating at a fair value of RM2.50 /share, based on a 20% discount to our We believe the offer was attractive. Recall that in our sum-of-parts valuation of RM3.13/share. Our fair value is report dated 25 November 2010, we highlighted that the pricing the stock at FY11F PE of 10x and FY12F PE of 9x. offer represented a premium of 23% to our fair value of RM4.13/share for Sunway City. The stock has retraced by some 20% since its listing on 22 Augustt this year, largely due to the weak market sentiment. Taking up the offer was an opportunity for Sunway City While we see value in the company, we believe our HOLD shareholders to move to a larger entity and a more liquid rating is justified given the lack of near- to mid-term company where property development would be the main catalysts. contributor to earnings. More importantly, the merger would see the Sunway brand strengthened whereby two property units are MERGER DETAILS housed under one brand thus aligning the group’s goals and objectives. Basically, this eliminates the previous Just to recap... market perception that these two units were competing against each other. It was announced on Bursa Malaysia in November 2010 that Sunway Holdings and its sister company, Sunway Plus with a bigger balance sheet, the group would be able City, would be merged under one entity – Newco i.e. to take on bigger projects i.e. developing or acquiring Sunway Bhd. Sunway Bhd had offered to acquire all their bigger landbanks and construction jobs as well as assets and liabilities. enhancing its overseas aspirations. Newco offered to acquire Sunway City shares at RM5.10/share and Sunway Holdings at RM2.60/share, for a total consideration of RM4.5bil. Basically, 80% of the offer would be satisfied via an issuance of Newco shares at RM2.80/share and the remaining 20% would be done via cash. On top of that, AmResearch Sdn Bhd 2 Sunway Bhd 14 November 2011 CHART 2: CORPORATE AND CORE BUSINESS Source: Company/ AmResearch INTEGRATED BUSINESS MODEL Sunway Giza is deemed to be the most attractive for monetisation in the immediate term. Other assets in the Synergistic benefits from closer property and pipeline include VeloCity mall, The Pinnacle and Sunway construction relationship Pyramid 3 (combined NLA of 1.6mil sq ft), which are only expected to be completed in the next two to three years. Sunway Bhd is an integrated property and construction These assets may only be injected into the REIT once it company with exposure to all types of real estate assets. has gone through its first positive rental revision i.e. The bulk of its earnings will come from property development typically after three years in operations. ~40%-45%, followed by rental income from its property investments and dividends from 37%-owned Sunway REIT – Massive portfolio of investment properties is an accounting for 20%-25%. advantage While Sunway has a reputable construction arm, it only Currently, there are 10 properties parked under Sunway contributes about 15% to the group’s total net profit due to for rental income. These assets include:- (1) the recently- average margins. The unit will be busy for the next few years completed Sunway Giza in Kota Damansara; (2) two with a current order book of RM2.4bil, comprising mostly education buildings i.e. Sunway University College and building jobs. Monash University Sunway Campus; (3) a hotel each in Penang, Phnom Penh, Cambodia and Hanoi, Vietnam; (4) The advantage of Sunway’s integrated business model two theme parks i.e. Sunway Lagoon and Lost World of is obvious whereby it is able to recycle its capital via the Tambun, and (5) a hospital in Sunway. monetisation of investment properties. The associate stake in Sunway REIT provides a ready platform for this We believe with the exception of Sunway Giza, the purpose. We believe this is the primary catalyst for any assets are not too attractive for injection into its re-rating for Sunway at this juncture. associate Sunway REIT given the types of the assets; for e.g. the Sunway Medical Center and the two However, among the assets in its portfolio, we believe education buildings do not provide the opportunity for asset-enhancement exercises, given that they serve TABLE 1: PROPERTY INVESTMENTS specific purposes with only a single tenant – which Properties Stake (%) sf/ rooms Value (RM'mil) may not be yield-accretive for the REIT. This is in stark contrast to a shopping mall whereby the asset Sunw ay Giza 60 98000 44.2 manager has the power to play around with the tenant Monash Uni Campus 100 754000 200.0 mix to suit the ever-changing market demand. Sunw ay Uni College 100 615983 219.0 Sunw ay Medical Centre 78 755940 213.6 TABLE 2: PROPERTY INVESTMENTS IN THE PIPELINE Sunw ay Hotel Georgetow n 100 240 72.0 Sunw ay Hotel Phnom Penh 53 138 14.6 Property Type GDV (RM'mil) NLA (sf) Expected completion Sunw ay Hotel Hanoi 100 142 28.4 The Pinnacle Office 320 560k 2013/2014 Sunw ay VeloCity Mall Retail mall 1600 845k 2015/2016 Source: Company / AmResearch Sunw ay Py ramid 3 Mixed commercial 500 220k 2013/2014 AmResearch Sdn Bhd Source: Company / AmResearch 3 Sunway Bhd 14 November 2011 In any case, given the gestation period between the earnings despite providing 30% sales to the firm due to a completion and the maturity of the said assets, the tough margin environment.