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Sunrise Bhd (AmResearch); maintain buy; fair value: RM3.06

Stronger unbilled sales of RM907mil

Investment Highlights
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• We maintain our BUY rating on Sunrise Bhd with an unchanged fair value of RM3.06/share based on a 15% discount to our estimated NAV of RM3.60/share.

• Sunrise reported net earnings of RM24mil for the 3QFY10, taking its cumulative nine-month earnings to RM95mil. This came way short of ours and street’s estimates – making up 52% and 59% respectively.

• Main reason for this shortfall can be attributed to delay in launching Solaris KL (estimated GDV: RM550mil). This development was earlier guided for launch by 2QFY10F, however now has been pushed to 2HFY10.

• As a result, we have cut our estimates for FY10F-FY12F by 10%-25% to RM138mil-RM227mil. Solaris Towers earnings will now be felt in FY11F where we have assumed 30% and 40% take-up for FY10F and FY11F respectively.

• Earnings declined by 16% YoY on back of lower revenue of 18%, which was due to the one-off gains of RM19mil in FY09 from the disposal of its investment properties.

• Stripping off the asset sale, Sunrise’s earnings would otherwise be flat – up 2% YoY. Margins were stronger at 26% versus 22% however, having recognised higher margin products such as The Residence and MK11 during the period.

• Nonetheless, earnings going forward have been boosted by stronger unbilled sales of RM907mil – as at end of April 2010 – from RM714mil in the last quarter. This is underpinned by the pick-up in sales in its latest product, MK28. Take-up rate has jumped to 50% from 38% earlier.

• Apart from Solaris Towers, for 2010 the group would also be focusing on its development in Canada – to be launched towards the end of the year. We understand the indicative pricing is CAD300psf and we are positive this development would be a success given the mature market and prime location.

• JV with Sime Darby is still at the preliminary stage and while we are positive of the planned development, earnings would only filter in FY2012 at the earliest. There also plans to revive its land in Kajang with a possibility of a township development – although details are sketchy at this juncture.

MAINTAIN BUY BUT SLASHING ESTIMATES

We maintain our BUY rating on Sunrise Bhd with an unchanged fair value of RM3.06/share based on a 15% discount to our estimated NAV of RM3.60/share. Our BUY rating continues to premise on the stronger property market where buyers have returned into the market. This is supported by the rising income expectation and favourable interest rate environment, which is aided further by attractive financing scheme on offer. However, given the lower than expected earnings, we have cut our estimates for FY10F-FY12F by 10%-25% to RM138mil-RM227mil with EPS translating to 28 sen – 47 sen respectively. Contribution from Solaris Towers will now be felt in FY11F where we have assumed 30% and 40% take-up for FY10F and FY11F respectively.

RESULTS CAME SHORT

Sunrise reported net earnings of RM24mil for the 3QFY10, taking its cumulative nine-month earnings to RM95mil. This came way short of ours and the street’s estimates – making up 52% and 59% respectively.

Main reason for this shortfall can be attributed to delay in the launching of Solaris KL (estimated GDV: RM550mil). This development was earlier guided for launch by 1H 2010, however now has been pushed to 2H2010.

Stripping off the asset sale, Sunrise’s earnings would otherwise be flat – up 2% YoY. Margins were stronger at 26% versus 22% however, having recognised higher margin products such as The Residence and MK11 during the period.

UNBILLED SALES BOOST BY MK28

Nonetheless, earnings going forward have been boosted by stronger unbilled sales of RM907mil – as at end of April 2010 where buck of it comes from MK11 62%, MK28 35% and other projects 3% – from RM714mil in the last quarter. This is underpinned by the pick-up in sales in its latest product, MK28.

We understand that take-up rate has rose to about 50% (or RM494mil in value) from 38% in January 2010 with average pricing has also increased to RM790psf from RM780psf. So far about 70% of the total sales have seen SPA completed while the remaining is pending SPA completion.

Recall that this project was soft-launched in December 2009 and officially launched in February 2010. MK28, located between Sunrise’s previous developments – Banyan and Meridin – comprises of 460 units with builtups ranging from 2,535sf to 3,000sf or 1.26 million sq ft in net saleable area.

LAUNCHES IN THE PIPELINE

Solaris Towers to be launched 2H 2010
Looking forward, Sunrise would be accelerating the launch of its maiden grade A office building in the Central Business District– a strata-title office development. Location is indeed favourable; along Jln Sultan Ismail with success would be aided easy accessibility via monorail.

Solaris would comprise of two office towers, offering net saleable area of 570,000 sq ft (550,000sqft is office portion & 220,000sqft is retail portion). All in, there will be 250 office suites and five retail spaces being offered. The management would welcome enbloc sale to reduce risk.

Richmond project to be launched 2H2010
Apart from that the group would be concentrating on its development in Canada (estimated GDV: CAD350mil or RM1.1bil) – to be launched towards the end of the year. We understand the indicative pricing is CAD300psf and we are positive this development would be a success given the mature market and prime location.

Specifically, this development is located along Road No 3, the busiest and main thoroughfare in Richmond, Vancouver. As mentioned before, this project would be launched in two phases over five to six years. Net saleable area on offer is about 720,000 sq ft where it would mostly be made up by smaller sized condominiums with some commercial/retail space.

JV with Sime Darby still at early stage
JV with Sime Darby is still at the preliminary stage and while we are positive of this project, earnings would only filter through in FY2012 at the earliest.

Recall that both Sunrise and Sime Darby had earlier signed a JV (50:50) to develop and integrated commercial project (estimated GDV: RM1bil) in Bukit Jelutong township. Development would comprise of retail portion, shop-offices, and office-suites and serviced apartments.

This project, located opposite to the Sime Darby Pavilion will be developed over seven years in five phases, beginning next year.

We think that the development would be well received given the lack of commercial development in the area with a catchment area to include Shah Alam and Subang. Due to scarcity of prime land, Bukit Jelutong has been one of most sought after areas for new homeowners and upgraders.

We also believe this partnership is a good deal for Sunrise as, apart from Mont Kiara, it does not possess substantial amount of landbank in the Klang Valley area. Given the unfamiliar territory of Bukit Jelutong, the JV would mitigate some business risk to Sunrise.
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