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Sunway City (ECM Libra) buy; target price RM5.00

More details on REIT revealed

• More details revealed on assets disposal

altFollowing last Friday’s announcement, Sunway City announced further details of the proposed assets disposal into Sunway REIT yesterday. While the assets will be injected into Sunway REIT at tentative valuation of RM3.7bn, the final value will be subject to adjustment after the bookbuilding process for the institutional block of Sunway REIT’s IPO. The maximum final value will however be capped at 110% of current valuation which has been appraised by valuer. Also to note is a gain on assets disposal of RM327.8m to be recognised in FY2010 which is contrary to earlier management’s guidance of a nil impact on earnings. Nevertheless, our adjusted EPS for FY2010 which only account for recurring income remain unchanged.

• Utilisation of cash proceeds explained
Management also revealed the utilisation of cash proceeds of RM2.7bn from the assets disposal. The biggest chunk of RM1.31bn relates to proceeds attributable to minority interest as compared to our earlier estimate of RM1.48bn. While we have previously suggested that the remaining proceeds will likely by reinvested, only RM500m has been earmarked for that purposes while another RM110m will be used as working capital for the development of two commercial projects in Sunway Integrated Resorts. The remaining RM780m will be used to settle borrowings to bring Sunway City into net cash position. Nevertheless, we hold firm to our belief that Sunway City has the capacity to increase its landbank in terms of GDV by at least another 50% to 100% by gearing up again. What’s missing from yesterday announcement is a special dividend which we previously suggested was a possibility.

• REIT listing by July
Management also guided that Sunway City shareholders’ approval will be procured by end May while the REIT listing will be completed by July.

• Reiterate BUY
Our earnings and valuation remain unchanged. We continue to rate Sunway City as one of our top picks. At current market capitalisation, investors are not only paying 16% discount for the net cash proceeds and 38.25% in Sunway REIT valued at RM2.2bn but also get all its development landbank for free. We maintain our TP of RM5.00 based on 14x P/E which is one standard deviation higher than average forward P/E of 9.9x. We believe this is justified given (1) 18.7% EPS CAGR over next 3 years, (2) unlocking hidden value in investment properties, and (3) potential upside from further expansion. Our TP is also supported by RNAV of RM6.36, with an implied discount of 21%.
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