Sunway-SunCity merger gets nod

KUALA LUMPUR: Shareholders of Sunway Holdings Bhd and Sunway City Bhd (SunCity) have approved the proposed disposal of the two companies' assets and liabilities to Sunway Bhd at their EGMs on Wednesday, June 15.

The approvals would pave the way for the merger of their assets under a larger company slated for a listing on Bursa Malaysia in the third quarter this year.

While it was no surprise that merger would receive shareholders' nods, Sunway group founder and chairman Tan Sri Jeffrey Cheah assured that all assets from both companies will be injected into the enlarged company.

"This is a lock, stock and barrel merger of the two groups. It is also a fair deal as everyone (including minority shareholders) gets their fair share," he said after the EGMs on Wednesday.

The new entity, called Sunway Bhd, will have two core businesses in property development and construction, with a potential market capitalisation of over RM3.5 billion.

The new entity will have a combined landbank of over 2,200 acres (890.3ha) with a total gross development value of RM25 billion.

Cheah said the new entity will be better capitalised and positioned to take on bigger projects in the future.

"The enlarged Sunway will allow optimised access to capital markets as the expected increase in liquidity will command better investor interest. It will also enjoy lower financing costs and enhanced cash management," he said.

Cheah said the merger would allow synergy between its construction and property development businesses, which will result in lower construction costs and better development quality.

"Efficiency will be improved with streamlined back-office functions," said Cheah.

The merger proposal was announced in November last year, with Sunway Bhd taking over the assets and liabilities of Sunway Holdings and SunCity in a deal involving cash and share swap for RM4.5 billion.

Under the deal, Sunway Bhd proposed to take over SunCity at RM5.10 per share and Sunway Holdings for RM2.60 per share. It also proposed to buy its respective warrants at RM1.29 and RM1.50 apiece.

The proposed deal will be done via the issuance of new shares in Sunway Bhd valued at RM2.80 each, and 80% of the offer will be settled by the new shares and the balance in cash.

In addition, existing shareholders of Sunway Holdings and SunCity will receive one free warrant for every five shares in the new entity.

After the completion of the merger, Cheah said the group will continue to focus on its regional expansion.

"There has always been offers from China, India and other countries to joint-venture in developing townships. With the enlarged entity, we would continue to consider these proposals but they have to be right," said Cheah.

He added that it is also bidding for construction projects under the Economic Transformation Programme (ETP) and has an order book of RM2.4 billion.

After the listing, the new entity will become the fourth largest property and construction player listed on Bursa, after UEM Land Holdings Bhd, S P Setia Bhd and IJM Land Bhd.

At the issue price of RM2.80 and the proforma historical earnings per share (EPS) for Sunway Holdings and SunCity for FY10 ended Dec 31, the new entity will have a price-to-earnings ratio (PER) of 11.72 times and a price-to-book ratio of 1.39 times, according to the company.

In comparison, UEM Land, S P Setia and IJM Land are currently trading at historical PERs of 46.3 times, 16.7 times, and 28.9 times, respectively, based on on Wednesday's closing prices and their earnings per share for FY10, according to calculations by The Edge Financial Daily.

Cheah said the RM2.80 is only a reference price and that the market will determine the full value of the new entity when listed.

"Our price-to-earnings and price-to-book ratios (when listed) are very low compared with other companies in the market. The new entity will have an upside as we are undervalued," said Cheah. However, he declined to say how much the new entity should be valued.

It is interesting to note that both Sunway Holdings and SunCity are trading at 2.7% and 4.11% premium over their respective offer prices of RM2.60 and RM5.10. Sunway Holdings and SunCity closed at RM2.67 and RM5.31 respectively, on Wednesday.

Sunway Holdings and SunCity's respective warrants however, are still trading at a discounts of 2.6% and 2.3% to their respective offer prices.

Nonetheless, analysts see further upside for the merged entity's stock from the issue price of RM2.80 as its earnings, size, liquidity and economies of scale will improve. They also pointed out that the new entity is being valued at a steep discount to its property peers.

"Further upside could also come from merger synergies which management estimates to be at least RM30 million over the next two years," said OSK Research in a note recently. It has a fair value of RM3.60 for the new entity, based on a 1.84 times book.