Unveiling hidden treasures. The injection of RM3.5b assets into the proposed Sunway REIT (SREIT) is expected to provide a one-off gain of 61sen/sh and upstream RM1.17b (RM2.49/sh) in net cash to SCity.
With expected net cash of RM1.00/sh post-SREIT listing, SCity may pay special net dividends of 30-35sen/sh and save the rest for growth.
We expect its re-rating to gain momentum and the stock to trade closer to our unchanged TP of RM4.80 on 25% discount to our RNAV.
Right, positive step. 8 investment properties (3 hotels, 2 malls, 2 office blocks and 1 hypermarket) worth RM3.5b in total will be injected into SREIT (Table 1). The application for approval for asset valuations was submitted to the Securities Commission on 6 Apr ‘10. This is a positive step towards unlocking the value of hidden gems within SCity.
61sen upside to our RNAV. Most investment properties were revalued in 2009 to reflect their market values. But there is potential upside to our RNAV of RM6.47/sh from two fronts: (i) reversal of deferred tax provision on revaluation surplus amounting to RM203m (43sen/sh) as assets disposed to REIT are tax-exempted, and (ii) gain of RM86m (18sen/sh) on disposal of hotels, which we have yet to factor into our forecast. In total, this could raise our RNAV to RM7.08 (+9%).
We estimate RM1.86b in gross cash (RM3.95/sh) may flow up, to SCity post-SREIT listing if SCity chose not to hold a stake in SREIT. However, we have assumed that SCity will retain 30% of the SREIT post-listing at an investment cost of RM689m. Hence, the net cash to SCity is estimated at RM1.17b (RM2.49/sh) (Table 1).
Generous dividends may follow. Post-listing, SCity is estimated to be in a net cash position of RM474m (or RM1.00/sh) from current net debt position of RM1.16b (net gearing of 53%). We expect SCity to keep a portion of its cash for land banking, regional expansion and building high-yielding investment assets for future injections, and reserve the balance to reward long-time shareholders with special net dividends of 30-35sen (or RM141m-165m payout), translating to 8-9% net yields.
SREIT – a long awaited exercise
RM3.5b asset value. 8 properties: (1) Sunway Pyramid Mall, (2) Sunway Carnival Mall, (3) Ipoh Hypermarket, (4) Menara Sunway, (5) Sunway Tower, (6) Sunway Resort Hotel & Spa, (7) Pyramid Tower Hotel, and (8) Sunway Hotel Seberang Jaya, will be injected into the proposed SREIT with a potential combined value of RM3.5b (Table 1).
How is it done? SCity and GIC Singapore (minority shareholders of Pyramid Mall, Sunway Resort Hotel and Pyramid Tower Hotel) will inject these 8 assets into the new SREIT in exchange for cash and units (we assumed SREIT will have a debt-to-asset ratio of 35% at listing).
These new units will then be offered for sale by GIC Singapore and SCity. Post-disposal, SCity may hold 25-35% of SREIT and we have assumed a 30%-stake in SREIT in our analysis.
Further upside to our RNAV. In FY09, SCity recorded a massive gross revaluation surplus of RM805m (or RM356.3m net of deferred taxes and allocation to minority shareholders). Despite the fact that these assets have been constantly marked-to-market, there is still upside from these revaluation activities to our RNAV of RM6.47/sh provided these assets are injected into SREIT as assets disposed into a REIT are exempted from capital gains tax.
RM203m in deferred tax write-back (or 43sen/sh). Over the years, SCity has steadily built up its deferred tax liabilities to RM452m (as at 31 Dec 2009).
Part of this deferred tax liabilities relates to provisions in relation to revaluation surplus. We believe a huge chunk of this RM452m deferred tax liabilities relate to Sunway Pyramid Mall.
The mall was first carried in its books at RM380m in FY06. By FY09, it was revalued upwards to RM2,244m, including c.RM450m in capex spent on the mall’s extension (which was completed in Nov 2007). Based on available information, we estimate that this mall coupled with Sunway Carnival Mall and Ipoh Hypermarket, have accumulated deferred tax
liabilities of RM203m (net of minority portion) that could be reversed and recognized as a one-off gain to enhance our RNAV.
RM86m in potential gain on disposal of hotels (or 18sen/sh). We have also yet to factor into our forecast potential gain on disposal of Sunway Resort Hotel & Spa, and Pyramid Tower Hotels which are carried at their historical book value of RM485m generating net property yield of 9.5%.
Assuming these hotels can be unlocked at cap rates of 7.1%, these award-winning hotels are potentially worth RM650m and could provide RM86m in gains on disposal (after minority’s share). Coupled with a deferred tax write-back, SCity’s RNAV could be enhanced to RM7.08 (+9%).
Expansion mode, incubating assets for future injection. Postlisting, SCity is estimated to be in a net cash position of RM474m (or RM1.00/sh) from current net debt position of RM1.16b (net gearing of 53%). Besides paying a special dividend of 30-35sen/sh, we expect SCity to keep a portion of its cash for land banking, regional expansion and building high-yielding investment assets for future injections (see Table 2). These investment properties will form a pipeline of assets that could be injected into SREIT in the future.