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Investment Highlights
• Sunway City Bhd (SunCity) reported core earnings of RM30mil in 3QFY10, which brings its cumulative 9MFY10 core earnings to RM111mil. This is short of expectations, accounting for only 63% and 48% of our and street’s estimates, respectively.
• It was also announced on Bursa Malaysia yesterday that SunCity and its sister company Sunway Holdings Bhd (Sunway Holdings) would be merged under one entity (Newco – Sunway Sdn Bhd) and both companies had received an offer by the Newco to acquire all their assets and liabilities/businesses.
• Newco, which would take over the listing of both companies, is offering to acquire SunCity shares at RM5.10/share and Sunway Holdings at RM2.60/share with a total consideration of RM4.5bil. This exercise is expected to be completed by the middle of next year.
• We understand 80% of the offer would be satisfied via an issuance of Newco shares at RM2.80/share and the remaining 20% would be done via cash. On top of that there would be free warrants in Newco on the basis of 1 Newco warrant for every five Newco shares.
• We think the offer is attractive: (1) The offer price of RM5.10/share represents a premium of 23% to our fair value of RM4.13/share. Recall that our fair value is arrived at after applying a 30% discount to our estimated NAV of RM5.90/share.
• (2) Taking up the offer is an opportunity for SunCity shareholders to move to a larger entity and a more liquid company where property development would be the main contributor to earnings – management is targeting 50% contribution.
• Its NAV and earnings growth would be supported by a combined land bank of 2,600acres including in Malaysia, Singapore, China, India and Sri Lanka with total GDV of RM25bil.
• Based on our estimates, the larger entity would potentially have a market capitalisation of RM3.5bil with combined revenue of RM3.5bil and earnings of RM320mil.
• (3) Given that 20% of the offer would be satisfied via cash distribution by the Newco. Management has indicated that the new entity is in a strong position to distribute RM900mil cash to shareholders.
• (4) There would be free warrants given to Newco shareholders as a sweetener. The exercise price of this warrant is RM2.80/share at par to the issue price of Newco shares.
TO MERGE WITH SUNWAY HOLDINGS
It was announced on Bursa Malaysia yesterday that SunCity and its sister company Sunway Holdings Bhd would be merged under one entity (Newco – Sunway Sdn Bhd) and both companies had received an offer by the Newco to acquire all their assets and liabilities/businesses.
Newco, which would take over the listing status of both companies, is offering to acquire SunCity shares at RM5.10/share and Sunway Holdings at RM2.60/share with total consideration of RM4.5bil. This exercise is expected to be completed by the middle of next year.
We understand 80% of the offer would be satisfied via an issuance of Newco shares at RM2.80/share and the remaining 20% would be done via cash. On top of that there would be free warrants in Newco on the basis of 1 Newco warrant for every five Newco shares.
Under the assets and liabilities takeover route, a 50% plus one vote is needed in order for the exercise to go through.
The management’s rationale for this exercise is to create a sizeable listed entity for all the group’s business activities, providing clarity of brand to market, shareholders and customers. In addition, the larger combined entity provides an opportunity to re-articulate the Sunway brand and renew foreign investors’ interest in the group.
Transaction structure
We understand that after the disposal of the businesses of SunCity, the group would return all proceeds amounting to the offer price to the shareholders, warrant holders, and holders of the ESOS options of SunCity by way of a capital repayment and reduction exercise under which all SunCity shares will be cancelled.
Warrant holders would also be paid RM1.29 per warrant that has yet to be exercised and the group would proceed to cancel all the outstanding warrants. Under this Warrant Scheme, the warrant holders of Suncity shall receive RM1.29 per warrant via a combination of Newco shares (80% of offer) and the remaining 20% would be satisfied via cash.
SHAREHOLDERS SHOULD ACCEPT OFFER
We think the offer is attractive: (1) The offer price of RM5.10/share represents a premium of 23% to our fair value of RM4.13/share. Our fair value is arrived at after applying a 30% discount to our estimated NAV of RM5.90/share.
(2) An opportunity for SunCity shareholders to move to a larger entity and a more liquid company where property development would be the main contributor to earnings – about 50%. The management indicated yesterday that the main focus of this company would be in the property development.
Its NAV growth would be supported by a combined land bank of 2,600acres including those in Malaysia, Singapore, China, India and Sri Lanka with total GDV of RM25bil.
Specifically, Sunway Holdings’ landbank include: (1) Bangi, Melawati, Templer, Tmn Equine, Sg Long and Rawang with total land bank of 410 acres and with an estimated GDV of RM1.5bil; (2) Overseas – (a) Yi Shun (Singapore), Jiangyin (China), Sri Lanka with total land bank of 431acres – RM3bil GDV)
Sunway Holdings’ property development ventures are presently under SunwayMas where it provided the strongest EBIT margins in the group’s FY09 results (15%) vis-a-vis other divisions such as construction (4%) and quarry (9%).
Furthermore, shareholders would also be able to ride on a stronger topline, driven by an order book of RM1.8bil from Sunway Holdings’ construction division.
Based on our estimates, the larger entity would potentially have a market capitalisation of RM3.5bil with combined revenue of RM3.5bil and earnings of RM320mil.
(3) Given that 20% of the offer would be satisfied via cash distribution by the Newco. Management indicated that the new entity is in a strong position to distribute RM900mil of cash to shareholders.
(4) There would be free warrants given to Newco shareholders as a sweetener. The exercise price of this warrant is RM2.80/share at par to the issue price of Newco shares.
RESULTS SUMMARY
Meanwhile, SunCity reported core earnings of RM30mil in 3QFY10, which brings its cumulative 9MFY10 core earnings to RM111mil. This is short of expectations, accounting for only 63% and 48% of our and street’s estimates, respectively.
Profit for the quarter was mostly driven by earnings from property sales mainly Sunway SPK and Sunway South Quay whilst also seeing 33%-owned Sunway REIT making some contribution.
We understand current unbilled sales are RM960mil and new sales are encouraging especially from Sunway SPK 3 Harmoni, A’ Marine and Sunway Rymba Hills.
• Sunway City Bhd (SunCity) reported core earnings of RM30mil in 3QFY10, which brings its cumulative 9MFY10 core earnings to RM111mil. This is short of expectations, accounting for only 63% and 48% of our and street’s estimates, respectively.
• It was also announced on Bursa Malaysia yesterday that SunCity and its sister company Sunway Holdings Bhd (Sunway Holdings) would be merged under one entity (Newco – Sunway Sdn Bhd) and both companies had received an offer by the Newco to acquire all their assets and liabilities/businesses.
• Newco, which would take over the listing of both companies, is offering to acquire SunCity shares at RM5.10/share and Sunway Holdings at RM2.60/share with a total consideration of RM4.5bil. This exercise is expected to be completed by the middle of next year.
• We understand 80% of the offer would be satisfied via an issuance of Newco shares at RM2.80/share and the remaining 20% would be done via cash. On top of that there would be free warrants in Newco on the basis of 1 Newco warrant for every five Newco shares.
• We think the offer is attractive: (1) The offer price of RM5.10/share represents a premium of 23% to our fair value of RM4.13/share. Recall that our fair value is arrived at after applying a 30% discount to our estimated NAV of RM5.90/share.
• (2) Taking up the offer is an opportunity for SunCity shareholders to move to a larger entity and a more liquid company where property development would be the main contributor to earnings – management is targeting 50% contribution.
• Its NAV and earnings growth would be supported by a combined land bank of 2,600acres including in Malaysia, Singapore, China, India and Sri Lanka with total GDV of RM25bil.
• Based on our estimates, the larger entity would potentially have a market capitalisation of RM3.5bil with combined revenue of RM3.5bil and earnings of RM320mil.
• (3) Given that 20% of the offer would be satisfied via cash distribution by the Newco. Management has indicated that the new entity is in a strong position to distribute RM900mil cash to shareholders.
• (4) There would be free warrants given to Newco shareholders as a sweetener. The exercise price of this warrant is RM2.80/share at par to the issue price of Newco shares.
TO MERGE WITH SUNWAY HOLDINGS
It was announced on Bursa Malaysia yesterday that SunCity and its sister company Sunway Holdings Bhd would be merged under one entity (Newco – Sunway Sdn Bhd) and both companies had received an offer by the Newco to acquire all their assets and liabilities/businesses.
Newco, which would take over the listing status of both companies, is offering to acquire SunCity shares at RM5.10/share and Sunway Holdings at RM2.60/share with total consideration of RM4.5bil. This exercise is expected to be completed by the middle of next year.
We understand 80% of the offer would be satisfied via an issuance of Newco shares at RM2.80/share and the remaining 20% would be done via cash. On top of that there would be free warrants in Newco on the basis of 1 Newco warrant for every five Newco shares.
Under the assets and liabilities takeover route, a 50% plus one vote is needed in order for the exercise to go through.
The management’s rationale for this exercise is to create a sizeable listed entity for all the group’s business activities, providing clarity of brand to market, shareholders and customers. In addition, the larger combined entity provides an opportunity to re-articulate the Sunway brand and renew foreign investors’ interest in the group.
Transaction structure
We understand that after the disposal of the businesses of SunCity, the group would return all proceeds amounting to the offer price to the shareholders, warrant holders, and holders of the ESOS options of SunCity by way of a capital repayment and reduction exercise under which all SunCity shares will be cancelled.
Warrant holders would also be paid RM1.29 per warrant that has yet to be exercised and the group would proceed to cancel all the outstanding warrants. Under this Warrant Scheme, the warrant holders of Suncity shall receive RM1.29 per warrant via a combination of Newco shares (80% of offer) and the remaining 20% would be satisfied via cash.
SHAREHOLDERS SHOULD ACCEPT OFFER
We think the offer is attractive: (1) The offer price of RM5.10/share represents a premium of 23% to our fair value of RM4.13/share. Our fair value is arrived at after applying a 30% discount to our estimated NAV of RM5.90/share.
(2) An opportunity for SunCity shareholders to move to a larger entity and a more liquid company where property development would be the main contributor to earnings – about 50%. The management indicated yesterday that the main focus of this company would be in the property development.
Its NAV growth would be supported by a combined land bank of 2,600acres including those in Malaysia, Singapore, China, India and Sri Lanka with total GDV of RM25bil.
Specifically, Sunway Holdings’ landbank include: (1) Bangi, Melawati, Templer, Tmn Equine, Sg Long and Rawang with total land bank of 410 acres and with an estimated GDV of RM1.5bil; (2) Overseas – (a) Yi Shun (Singapore), Jiangyin (China), Sri Lanka with total land bank of 431acres – RM3bil GDV)
Sunway Holdings’ property development ventures are presently under SunwayMas where it provided the strongest EBIT margins in the group’s FY09 results (15%) vis-a-vis other divisions such as construction (4%) and quarry (9%).
Furthermore, shareholders would also be able to ride on a stronger topline, driven by an order book of RM1.8bil from Sunway Holdings’ construction division.
Based on our estimates, the larger entity would potentially have a market capitalisation of RM3.5bil with combined revenue of RM3.5bil and earnings of RM320mil.
(3) Given that 20% of the offer would be satisfied via cash distribution by the Newco. Management indicated that the new entity is in a strong position to distribute RM900mil of cash to shareholders.
(4) There would be free warrants given to Newco shareholders as a sweetener. The exercise price of this warrant is RM2.80/share at par to the issue price of Newco shares.
RESULTS SUMMARY
Meanwhile, SunCity reported core earnings of RM30mil in 3QFY10, which brings its cumulative 9MFY10 core earnings to RM111mil. This is short of expectations, accounting for only 63% and 48% of our and street’s estimates, respectively.
Profit for the quarter was mostly driven by earnings from property sales mainly Sunway SPK and Sunway South Quay whilst also seeing 33%-owned Sunway REIT making some contribution.
We understand current unbilled sales are RM960mil and new sales are encouraging especially from Sunway SPK 3 Harmoni, A’ Marine and Sunway Rymba Hills.
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