Beats the market; targets RM1.5b sales

Maintain Buy. SunCity’s 2010 RM191m normalised net profit came in above expectations. This year, SunCity targets RM1.5b sales (+22% YoY). In our view, a bigger entity with RM3.6b market capitalisation and an enlarged balance sheet post-SunCity-SunHoldings merger will improve shares trading liquidity and enable the merged entity to take on larger projects. We raise our forecasts by 3-9% but maintain the RM5.10 target price (offer price). We advise shareholders to accept the merger offer. SunHoldings warrants provide a cheaper entry to the new
Sunway group.

Stunning core 2010 results. SunCity’s 2010 core results beat our estimates and consensus by 12%. 2010 pretax profit dropped 47.9% but this was due to various one-offs such as i) RM378m worth of adjustments (see Table 2) and (ii) RM29m provisions for the Sunway Palazzio project (RM17m) and leisure division (RM12m for a medical program). Core net profit nevertheless jumped 40% YoY on revenue growth of 10% YoY and much improved associate/jv contributions, the bulk likely coming from SunREIT and Sunway-SPK. Net gearing increased slightly to 0.12x, from 0.03x (3Q10), due to land acquisitions in Penang and Johor Bahru.

Aiming for RM1.5b property sales. SunCity recorded RM1.2b sales in 2010 (+124% YoY). This was 23% above its RM1b initial target. As at Dec ’10, SunCity’s unbilled sales were RM1.1b, or 1.1x of our 2011 forecast. It now targets RM1.5b property sales in 2011 (+22% YoY), against our new RM1.6b sales forecast. We believe our estimate is not excessive given RM2.8b worth of new launches, which include the strategically located RM3.6b Sunway Velocity, the strong pull factor for which is the proposed MRT station in Taman Maluri.

We raise forecasts by 3-9% to factor in higher sales assumptions of RM1.6b (RM1.3b previously). We introduce our 2013 forecasts which include the recent JB land purchase. To recap, SunCity had proposed to buy 64.6 acres of freehold land in Mukim Plentong, Johor Bahru last year for RM134.5m or RM47.80 psf. This project, which is 80%-owned by Suncity, will be developed into a high-end mixed residential project with GDV of RM932m. It is expected to be launched by 2012.

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