Sunrise Bhd (OSK Research) neutral; target price RM2.80

Update on Takeover Offer


As of 20 Dec 2010, the level of acceptance by Sunrise shareholders in relation to the takeover offer from UEM Land reached 78.83% (Bursa)

The takeover offer. To recap, on 4 Nov 2010, UEM Land (Not Rated) announced a conditional takeover to acquire the entire equity interest in Sunrise at an offer price of RM2.80/share. The shareholders of Sunrise have been offered the following options:

. To accept 1.33 UEM Land shares at an issue price of RM2.10/share for every Sunrise share surrendered; or

. To accept 2.8 unlisted Redeemable Convertible Preference Share (RCPS) in UEM Land at an issue price of RM1.00 for every Sunrise share surrendered. Wiith its 2-year tenure, there will not be any dividend attached to the RCPS.

Holders of the RCPS may convert their RCPS to UEM Land shares at any time at a price of RM2.30 each.

The redemption value of the RCPS at maturity will be priced at RM1.00. If the holders of RCPS do not exercise their options to covert/redeem, upon maturity, the RCPS will be automatically converted into UEM Land Shares based on the non-cash conversion method.

Sunrise’s listing status will be withdrawn. As of 20 Nov 2010, the level of acceptance by the shareholders of Sunrise to the takeover offer from UEM Land had reached 78.83%. As a result, since Sunrise no longer meets the public shareholding spread requirement, UEM Land does not intend to maintain the listing status of Sunrise post completion of the takeover exercise.

Valuation and recommendation. Since it is now inevitable that the listing status of Sunrise will be withdrawn after completion of the takeover exercise, investors are urged to make one of the following decisions prior to 7 Jan 2011:

. Accept the share swap option. This option offers the most rewarding potential but investors must take note of the risks involved.

This may include, for example, a prolonged gestation period for any major synergistic value to be realised as a result of the challenging task of merging two entities with differing business culture, which may take more than two years.

In addition, regardless of the merger, the tipping point for Nusajaya is only likely to occur around 2012/13, or at least 1-2 years from now, when most of the catalytic developments come onstream; or

. Accept the RCPS. This option offers a good hedge to investors who are concerned with the risks in the share swap as it offers the opportunity for him/her to subsequently
convert the RCPS into UEM Land shares and ride on the upside should the synergy of the merger be achieved in less than 24 months.

It also has very limited downside risk as it would be redeemed at face value by UEM Land 2 years on. Nonetheless, this option comes at a cost, as the exercise price for the RCPS will be RM2.30 for each share of UEM Land instead of RM2.10. In addition, as the RCPS will not be listed, there will be no early exit for the investor and he/she must therefore take into account the potential opportunity cost involved; or

. Cash out. Skeptics who are unimpressed by the risk-reward ratio and the opportunity cost involved in other options may opt to cash out from Sunrise. They may then redeploy
their investment capital elsewhere, such as to other Malaysian property stocks in the likes of SP Setia (Buy; TP: RM6.58), for example.

As we believe that the Malaysian property sector is at the cusp of a strong positive re-rating over the next 12 months, this option may appeal to this group of investors.

An opportunity for arbitrage? We note that based on the current share price of UEM Land of RM2.54, this would imply a value of RM3.38 per Sunrise share based on the share swap ratio of 1.33 UEM Land shares for every Sunrise share held.

As Sunrise is merely trading at RM3.14 now, and assuming that the current share price of UEM Land is sustainable even after the takeover exercise, there could still be a potential arbitrage opportunity for Sunrise shareholders to make RM0.24 even if they bought into the stock at the current level and opt for the share swap option before 7 Jan 2011.

This of course assumes that the share price of UEM Land is sustained into the conversion period.

Although we do not cover UEM Land, an indicative fair value based on 1.3x P/RNAV post merger would range between RM2.48 to RM2.58.

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