SunCity: ‘Buy’ call maintained by ECM Libra

· Injecting 8 properties into REIT

SunCity yesterday (April 7) announced the injection of eight investment properties into its proposed real estate investment trust (REIT) for a consideration to be determined later. These properties are (1) Sunway Pyramid Shopping Mall, (2) Sunway Resort Hotel & Spa, (3) Pyramid Tower Hotel, (4) Menara Sunway, (5) Sunway Carnival Mall, (6) Sunway Hotel Seberang Jaya, (7) Suncity Ipoh Hypermarket, and (8) Sunway Tower. The sale consideration will be satisfied by way of cash or units in the proposed REIT or a combination of both.

SunCity also proposed to dispose three parcels of leashold land measuring 19,406 sqm to Sunway Pyramid Sdn Bhd for a consideration to be determined at a later date. SunCity also entered into two separate letters of intent (LOI) to acquire GIC’s minority stakes of 48% in Sunway Pyramid Shopping Mall and Sunway Resort Hotel & Spa. Both parties will enter into definitive sales and purchase agreements in due course. The LOI is subject to the approval of SunCity’s shareholders at an EGM and the listing of SunCity’s proposed REIT.

· Value of REIT estimated at RM2.9 billion

We estimate the eight investment properties have an estimated value of RM2.9 billion, based on 6.5% cap rate, which will put SunCity’s proposed REIT to be the largest REIT in Malaysia upon listing.

No revisions are made to our earnings estimates as details of the sale consideration and manner of its satisfaction are not revealed yet.

Nevertheless, we are positive on this news as SunCity has made another step towards realising its long awaited REIT listing plan. We expect more properties to be injected into the REIT subsequent to its listing. Some of these properties include Monash University Campus, Sunway University Campus, Sunway Hotel in Penang, and Sunway Medical Centre.

Furthermore, the group will be developing several new commercial properties in the Klang Valley which will ensure an ample pipeline of prime assets to be injected into the REIT in the future.

· Reiterate BUY

We maintain our buy call as we like Sunway City for its undemanding 10.3x P/E and 36% discount to RNAV of RM5.77. We also maintain our target price of RM4.33 based on 12x P/E on FY2010 EPS. With increasing sales momentum, Sunway City’s valuation is compelling as our new target price implies PEG multiple of 0.7x only.

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