Minimal earnings impact on Sunway from Sunway Clio disposal

Sunway Bhd (Aug 4, RM4.34)

Maintain neutral with an unchanged target price (TP) of RM4.25: Sunway Bhd announced that it had entered into a sale and purchase agreement to dispose of Sunway Clio to Sunway REIT for RM340 million. Sunway had also entered into a hotel-lease agreement with Sunway REIT to lease back Sunway Clio for an initial term of 10 years. The asset disposal is expected to complete in the fourth quarter of financial year 2017 (4QFY17).

Sunway Clio is located within the township of Sunway City, in close proximity to Sunway Resort Hotel & Spa. Sunway Clio is a 19-storey four-star rated hotel with 401 rooms. Sunway Clio also has 88,384 sq ft of retail space. Construction of Sunway Clio was completed on Feb 12, 2016 with an estimated total development cost at RM303.2 million. Sunway is expected to recognise a gain of RM29.4 million from the disposal.

We are positive on the disposal as we think that it is timely to help bring down the net gearing of Sunway. The net gearing of Sunway is expected to climb above 0.54 times from 0.47 times in 2QFY17 following a slew of land acquisitions earlier this year with a total purchase consideration of more than RM500 million. Sunway intends to utilise RM275 million or 81% of the proceeds from the disposal for repayment of borrowings. We estimate the net gearing of Sunway to be contained at around 0.5 times post disposal of Sunway Clio.

Core earnings impact from the disposal is minimal. We estimate an interest cost savings of around RM13 million to be largely offset by the lease payment for Sunway Clio. Overall, we raised our net income forecast for financial year 2018 (FY18) by 4.9% after taking into account a disposal gain of RM29.4m. Nevertheless, our core net income estimates remained unchanged as we treat fair value gain as an one-off item.

We maintain neutral with our target price for Sunway at RM4.25, based on sum-of-parts valuation. — MIDF Research, Aug 4

This story first appeared in TheEdgeProperty.com pullout on Aug 7, 2017. Download TheEdgeProperty.com pullout here for free.