HLG Research: Sunway City Bhd – Buy

* Core earnings beat HLG and street estimates

FY09 revenue of RM1.6 billion was 3% below our forecast, but FY09 core net profit of RM223 million was 32% ahead of our forecasted RM169 million (consensus: RM176 million). FY09 lasted 18 months due to a change in financial year-end from June to December. On an annualised basis, revenue declined 18.6% y-o-y due to a 50% y-o-y decline in property billings for FY09. Project billings were mainly contributed by Sunway Damansara and Sunway SPK. Meanwhile, investment income rose by 25% y-o-y. For FY09, Suncity booked in property revaluation surplus of RM805 million at PBT level; stripping out this exceptional gain, normalised net profit was RM223 million vs the reported RM563 million. A 5 sen per share final dividend was declared in 6Q09.

* Look to FY10 for stronger launch lineup and earnings growth

The flat growth in FY09 was unsurprising as Suncity chose to hold back launches amidst cautious sentiment by developers in 2009. Suncity launched only RM233 million of projects in FY09 vs. RM1.8 billion in FY08. As a result, unbilled sales are currently RM637 million, which provides only four to five month’s earnings visibility based on our forecasted FY10 revenues. Suncity clearly needs to ramp up its launches, and management has indicated that there will be 11 project launches in Malaysia, China and India with total GDV of RM830 million in FY10. However, we also noted that Suncity signed an MOU with Sino-Singapore Tianjin Eco-City Investment and Development Co to develop mixed develop projects in Tianjin, China on Nov 30, 2009 but there has been no updates since then.

* REIT expected to be finally launched this year

Having experienced repeated delays for the past two years, the Suncity REIT is finally expected to be launched this year. The company has made a formal announcement to Bursa after appointing RHB as the advisors. Exact constituents for the initial REIT listing are yet to be finalized, but Sunway Pyramid and Sunway Towers KL 2 (formerly Wisma Denmark) will be the obvious choices to be injected into the initial REIT.

* Re-rating expected this year, maintain BUY call

Suncity remains fairly cheap compared to its big-cap peers such as SP Setia and IJM Land, although not as cheap as Sunrise. Share price has been stuck in the RM3 – RM3.50 zone but we expect a significant re-rating in share price this year due to (1) the aforementioned REIT listing and (2) pick-up in sales and launches in FY10. Our PT is maintained at RM4, a slight discount to RNAV.


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