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Sunway City Bhd (Inter-Pacific Research) outperform; target price RM4.70

Slightly better first quarter

Highlights:


Valuation: Sunway City unbilled sales stands at RM630mn, indicating 1 year earnings visibility. Driven by a better contribution from the property segment in 2010, our fair value is pegged at RM4.70 based on a PER of 12x and EPS of 39sen. Our target price is 28% discount from the estimated RNAV per share of RM6.51. We expect revision in Suncity rating and financial forecast post injection of the prime assets in Sunway REIT. We recommend OUTPERFORM.
 
1QFY10 revenue rose by 7.8% y/y to RM283.3mn: 1QFY10 Top line improved on account of stronger revenue from property investment, leisure, hospitality and healthcare segment. The improvement in the above segments was due to better visitor-ship and tenant rental rate as a result of the recovering economy. Combined income of RM189.4mn from the four segments improved by 16% y/y compared to 163mn in 3QFY09. However, property development segment’s revenue fell by 5.4% y/y and hence partly put a lid on the overall upside of 1QFY10 top line.

Better earnings quality: Suncity net profit margin grew by 37.9% y/y to RM42mn driven by better earnings quality of property investment, property development, leisure and hospitality segment. Main contributors to Suncity’s property development segment in 1QFY10 are high end development i.e. Sunway Damansara and Sunway Palazzio projects which provided higher development margin. Property investment and leisure segment also yield higher margin due to the increase in visitor-ship.
 
Stronger balance sheet: Suncity net gearing improved to 0.49x in 1QFY10 compared to 0.53x in 6QFY09 due to stronger cash pile of RM486mn and lesser borrowings of RM1.64bn in 1QFY10 compared to RM438mn cash and RM1.6bn borrowings in 6QFY09. NAV per share improved to 8% from RM4.68 to RM506 due to reversal of deferred tax liability.

Property development segment hold up, expect improvement moving forward: Suncity achieved sales of RM139mn in 1QFY10 is in line with management target of RM135mn, but dropped by 11.5% compared to RM155mn sales attained in 6QFY09. We are expecting brighter future for the property segment due to the positive response from their newly launched development which within a week from its launch registered impressive booking: (1) Sunway SPK 3 Harmoni(GDV RM161mn) 80% booked; (2) Sunway Rymba Hills( GDV RM270mn) 50% booked ; and (3) A’Marine( GDV RM200mn) 40% booked. Their Maiden project in China, Sunway Guanghao in Jiangyi China with RM60mn worth of condominium launched in the 1st phase,achieved 65% booking already.

REIT listing proposal secured shareholders approval: On 26 May 2010, the relevant subsidiaries of SunCity, being the Vendors of the Properties, entered into eight (8) separate conditional SPAs with the OSK Trustee Berhad on behalf of Sunway REIT in relation to the Proposed Sunway REIT for RM3.7bn. The consideration is to be satisfied by the proposed issuance of 1.0bn units in the Sunway REIT and the balance of RM2.7bn in cash.

Upon the completion of the Sunway REIT, SunCity will own approximately 35% of the issued units subject to the over-allotment option being fully exercised. The proceeds will be used for the repayment of borrowings, business expansion including land acquisitions and working capital. Upon the disposal of the Properties, SunCity’s net gearing will improve from 0.49X (as at 31 March 2010) to nil.

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