Diversified income stream favours Sunway

Sunway Bhd (July 25, RM4.26)

Reiterate buy call with an unchanged target price (TP) of RM5.04: Sunway Bhd has obtained the necessary approvals from Bursa Malaysia with regard to its earlier proposals: listing of up to 2,804,471,128 bonus shares to be issued; admission to the official list and the listing and quotation of the proposed issuance of up to 631,006,003 bonus warrants; and listing of up to 631,006,003 new Sunway shares to be issued pursuant to the exercise of the warrants.

While we do not expect any hiccups in Sunway’s proposed bonus issues of shares and warrants, the approvals came in ahead of our expectations, especially involving the first-of-its-kind step-down mechanism for the warrant exercise price.

To recap, Sunway proposed to issue four bonus shares for every three existing shares and three free warrants for every 10 existing shares back on June 14, 2017.

With the above approvals, we expect the group to hold an extraordinary general meeting in August to secure shareholder approval before finalising the ex-dates and exercise price of the free warrants (based on the five-day volume weighted average market price). Judging by the fast turnaround, we can expect the exercises to be completed before the end of September.

We reiterate our “buy” call as the above approvals will serve as strong share price support reinforced by long-term rerating value play given its diversified income stream and recent reclassification under the trading/services sector.

Besides, potential asset unlocking worth up to RM1.4 billion and the potential spin-off of its growing healthcare business, which could eventually fetch more than RM3 billion, are the other catalysts.

Risks to our call include a prolonged downturn in Johor’s property market and execution risk.

Sunway remains our top pick within the sector as we believe it should be rerated and trade closer to its peers, such as IJM Corp Bhd and Gamuda Bhd, given its diversified income stream and declassification from the property sector.

At a price-earnings ratio of 13.6 times compared to peers, we opine that it represents a deep-value stock with potential asset unlocking and a growing healthcare business which are underappreciated. Our TP of RM5.04 is derived based on sum-of-parts valuation with a 10% holding discount. — Hong Leong Investment Bank Research, July 25

This article first appeared in The Edge Financial Daily, on July 26, 2017.

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