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Sunway City (OSK Research) buy; target price RM4.49

Nod For Sunway REIT Listing

THE BUZZ

altThe Securities Commission has approved the listing of Sunway Real Estate Investment Trust (Sunway REIT). The listing of the REIT must be completed within 6 months upon the said approval. (Bursa)

OUR TAKE

A Trading Buy opportunity; price target of RM4.49. We estimate that Sunway City will potentially gain a further .65.1 sen/share to its current Net Asset after injecting some of its investment properties into Sunway REIT, bringing it to about RM5.28/share. Pegging this against 0.85x-0.90x P/NTA, which is the average at which its peers are currently trading, we estimate that Sunway City will likely trade very close to RM4.49 to RM4.75 as the listing of Sunway REIT gets closer to realisation within this year. For more details on how the price target is derived, refer to Figure 3. Note that Sunway City is not under our regular research coverage at the moment.

altBecoming one of the largest M-REITs. Sunway City recently proposed to monetize and securitise some of its investment properties via Sunway REIT. Now that the listing of the REIT has been approved by the Securities Commission, Sunway REIT is expected to be listed sometime in 3QCY10 or, latest by 4QCY10. Post listing of the trust, Sunway REIT will be one of the largest M-REITs with a total assets worth about RM3.7bn (see Figure 1). Part of the purchase consideration for the properties to be acquired from Sunway City will be satisfied via an issuance of 1,025,143,000 new Sunway REIT units at RM1.00/unit.

Sunway City to hold a strategic stake. In addition to the new 1,025,143,000 units of Sunway REIT to be issued to Sunway City as part of the purchase consideration to acquire the properties from the latter, the upcoming trust will offer 1,654,969,300 units of Sunway REIT for subscription via public offering. This thus implies that Sunway City will hold a strategic stake of 38.3% in Sunway REIT upon the listing of the trust (see Figure 2).

altA good TRADING BUY now. Sunway City announced in February 2010 that it had revalued its investment properties upwards in 4QCY09, thus giving rise to a huge revaluation surplus. The revaluation implied that had Sunway City proceeded with Sunway REIT soon, the revalued Net Asset of RM4.68/share should be a good yardstick for the market to gauge how much Sunway City would be worth upon the injection of its investment properties into the REIT. True, when Sunway City announced in April 2010 that it would proceed with the listing of Sunway REIT, the market had immediately re-priced Sunway City to about 0.8-0.85x CY10 P/NTA (after the revaluation of its investment properties), the average valuation its comparable peers were trading at during that time.

Now that we know which investment properties would eventually be injected into Sunway REIT and at what price, we estimate that Sunway City will potentially add a further .65.1 sen/share to its current Net Asset, bringing it to about RM5.28/share. Pegging this against 0.85x-0.90x P/NTA, which is the average that its comparable peers are currently trading at, we estimate that Sunway City will very likely trade close to RM4.49 to RM4.75 as the listing of Sunway REIT gets closer to realisation within this year. Based on this back of the envelope calculation, we believe the price target of RM4.49 is conservative. Coupled with the fact that the stock is merely trading at 0.72x to its revalued Net Asset of RM5.28/share, we reckon now could be a good opportunity for investors to accumulate on Sunway City.

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