Raising stake in Sunway South Quay will lead to higher future earnings for Sunway

Sunway Bhd (Oct 11, RM1.80)

Maintain neutral with a higher target price (TP) of RM1.83: Sunway Bhd announced that it is raising its stake in Sunway South Quay from 60% to 80% by acquiring 50,000 ordinary shares held by Kuwait Finance House (Malaysia) Sdn Bhd (KFH) in Sunway South Quay Sdn Bhd (SSQ) at a purchase consideration of RM136.6 million.

Sunway will also repay, on behalf of SSQ, a sum of RM73.4 million in cash towards the settlement of “musyarakah” capital invested by KFH in SSQ. The proposed acquisition is expected to be completed in the last quarter of 2017.

We are positive on the acquisition, as it will lead to higher future earnings for Sunway following higher ownership in Sunway South Quay. Note that SSQ is primarily involved in the development of Sunway South Quay, which is a mixed development in the integrated township of Sunway City with remaining gross development value (GDV) of RM3 billion. Launches of projects in Sunway South Quay for financial year 2017 (FY17) include Sunway Geo Residences 3 with GDV of RM400 million.

Sunway intends to fund the acquisition via bank borrowings and internally generated funds. Impact on the balance sheet from the acquisition is expected to be minimal. We estimate net gearing of Sunway to be lifted marginally to 0.35 times from 0.32 times as at end-June 2017.

Meanwhile, earnings impact from the acquisition is expected to be minimal, hence we maintain our earnings estimate for FY17 to FY18 forecast.

Maintain “neutral” on Sunway due to its neutral sales outlook, with a revised TP of RM1.83. Our TP has been revised from RM1.81 to RM1.83 after factoring in the higher stake in Sunway South Quay. We also update our valuation on Sunway Real Estate Investment Trust (Sunway REIT) to reflect the latest TP for Sunway REIT. Our TP is based on sum-of-parts valuation. — MIDF Research, Oct 11

This article first appeared in The Edge Financial Daily, on Oct 12, 2017.

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