Sunsuria Bhd (April 13, RM1.51)

Upgrade to buy, with a target price of RM3: Sansuria is enlarging its effective land bank on hand from 4.7 acres  (1.9ha) to 206.23 acres with a RM350 million acquisition. Its total effective gross development value (GDV) grows to RM4.5 billion (from RM326 million) which will ensure its medium-term earnings growth momentum. The land to be acquired is mainly concentrated within the Klang Valley (Salak Tinggi and Setia Alam) as well as a small stake in a development in Medini, Iskandar Malaysia in Johor.

The bulk of the RM350 million deal is for Sunsuria Serenia (a development surrounding the Xiamen Malaysia University [XMU] Campus in Sepang) for RM238 million (RM31.5 per sq ft [psf]). The rest of the transaction is for Sunsuria Medini and Suria Hills which were bought for about RM72psf and RM119psf respectively.

Based on our checks, we believe the acquisition price for Sunsuria Serenia is fair, given recent asking prices for land in the surrounding area hovering at RM26psf to RM28psf compared with Sunsuria Serenia (RM31.50psf), which has better connectivity (located next to the Express Rail Link station) and enveloping an upcoming university.

Currently, Sunsuria has the first right of refusal for two parcels of land, which include the remaining 50% stake in Sunsuria Serenia as well as Sunsuria 7th Avenue II in Setia Alam. Sunsuria Development Sdn Bhd currently owns about 81% of Sunsuria 7th Avenue II. We understand the company is still negotiating with minority shareholders to inject the land bank into Sunsuria. This 14-acre site has the potential to generate about RM1.3 billion in GDV offering high-rise residential towers. The site is situated 1.5km away from the Setia Alam Mall in Shah Alam.

In May last year, the company announced a three-for-one rights issue that could raise RM308.8 million (based on a rights price of 65 sen per share) and to be used to pay for the recently announced land bank acquisition and for working capital. The rights issue would be priced at least at a 25% discount to its theoretical ex-rights price. Post rights issue, the company has also proposed a 10% private placement to further strengthen its balance sheet for possible land banking.

The company is targeting to launch about RM676 million worth of projects this year, followed by a quantum leap to RM1.2 billion in financial year 2016 (FY16). The bulk of the launches in FY16 will be in Sunsuria Serenia, offering both residential and commercial properties. The first rollout of projects in Sunsuria Serenia will be the commercial areas facing XMU as well as some residential components that will mainly cater for the incoming population of the university which is expected to open in 2016. We expect demand for Sunsuria Serenia to be brisk and see profit recognition within two years as the bulk of the projects offered are landed developments which have a shorter construction period.

We understand the construction of the XMU campus (a project that is entirely funded by Xiamen University in China and construction has been awarded to a Chinese contractor) is progressing smoothly and is expected to be completed by end-2015. XMU (first student intake expected in early 2016) will greatly enhance the value of Sunsuria’s Xiamen township development.

We make no changes to our earnings forecasts pending completion of the acquisitions. However, we note that upon completion of the acquisitions, Sunsuria will see a quantum leap in earnings that could potentially reach RM30 million in FY16 and over RM100 million in FY17 (which implies post-rights price-earnings ratio of about 9.1 times). 

Key risks include: (i) regulatory and shareholders’ approval for the transaction; (ii) rising interest rates; (iii) tighter lending policies; and (iv) higher cost of raw materials that may lead to margin erosion.

Upgrade to “buy” with a target price of RM3, based on a 40% discount to the theoretical ex-rights revised net asset value (RNAV) per share. There could be a further upside to our RNAV should Sunsuria decide to exercise its first right of refusal for the remaining 50% stake in Sunsuria Serenia and Sunsuria 7th Avenue. — UOB KayHian Research, April 13

This article first appeared in The Edge Financial Daily, on April 14, 2015.

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