Analysts give thumbs-up to Sunway-SunCity merger

KUALA LUMPUR: Analysts are positive on the Sunway Holdings Bhd and Sunway City Bhd (SunCity)'s proposed merger, saying it is synergistic and they advise shareholders to accept the merger offer.

Sunway's chairman Tan Sri Jeffrey Cheah Fook Ling and his daughter Sarena Cheah, SunCity's strategic and corporate development director, made an offer to take over the assets and liabilities of Sunway and SunCity in a deal involving cash and shares swap totalling RM4.5 billion.

The acquisitions will be carried out through Cheah's investment vehicle, Sunway Sdn Bhd (SSB).

Under the deal, SSB has proposed to take over SunCity at RM5.10 per share and Sunway Holdings for RM2.60 per share which will be satisfied via the issuance of new shares valued at RM2.80 (80%) and cash (20%).

SSB will also issue new warrants for all Sunway Holdings and SunCity shareholders on the basis of one SSB warrant for every five shares.

Maybank IB Research is positive on the merger given the "good pricing" in the form of SSB shares and cash.

"The merger will result in a bigger entity with RM3.6 billion in market capitalisation (1.7 times current SunCity, 2.7 times of SunHoldings), hence, offering better shares trading liquidity," it said in a report on Thursday, Nov 25.

Post-merger, Maybank IB Research said it estimated SSB's fully diluted revalued net asset value (RNAV) to be RM3.70 per share, offering a 32% upside from its RM2.80 issue price.

Maybank IB Research also said that unlike the recent UEML-Sunrise and IJML-MRCB mergers, the SunCity-Sunway Holdings merger has the lowest integration risk involving management and corporate culture.

HwangDBS Vickers Research said the merger would ensure better utilisation of resources within the group and create a bigger vehicle with a stronger balance sheet to undertake bigger projects.

Analyst Yee Mei Hui, who covers both SunCity and Sunway Holdings, said the offer price of RM5.10 for SunCity was "fair" as the 14% premium to the last closing price was similar to the average premium for recent merger and acquisitions (M&As). Also, the offer price was at a 12% discount to HwangDBS's RNAV of RM5.81 compared to the sector average of 32% and 12.5 times 2011 forecast price to earnings ratio (PER) which it found comparable to the sector average.

For SSB, the RM2.80 valuation implies a reasonable nine times 2011 forecast PER, Yee wrote in the report.

She also said the offer price of RM2.60 for Sunway Holdings was fair. She said this was because it was at 4% discount to its sum-of-parts derived target price of RM2.70. This offer price also values Sunway Holdings at 13 times FY11 forecast earnings per share and 1.6 times book value versus the sector's average of 18 times and 1.6 times respectively.

"We are positive that the offer includes a cash portion together with free warrants," Yee added.

Affin Investment Bank thinks that the merger is long overdue, offering plenty of synergies. This is because SSB, which will serve as the platform for Sunway's regional expansion strategy, will have stronger financial muscles, technical expertise, and experience in several overseas markets such as China, India and Singapore.

SSB will also have a larger market cap, increased free float and probably better trading liquidity, with a heavier weightage in major indices, which will be more appealing to institutional investors, according to Affin.