Sunday, October 27, 2013

Sunway Bhd - The Rising Sun Flag in South Quay (MKE)

Sunway Bhd -
Hold (unchanged)
Share price: MYR2.96
Target price: MYR2.97 (unchanged)
The Rising Sun Flag in South Quay

A positive development. We are positive on Sunway’s latest JV with Mitsui Fudosan – one of the leading developers in Japan – for its South Quay project. The JV should raise Sunway’s profile among the Japanese community and allow it to tap into the latter’s existing clientele base. No change to our earnings forecasts and MYR2.97 TP (0.68x P/RNAV; 0.1x above its historical mean). Maintain HOLD.

JV with Mitsui Fudosan. Sunway’s 60% subsidiary, Sunway South Quay (SSQ) has entered into a 67:33 subscription and shareholders’ agreement (SSA) with Mitsui Fudosan (MF) to jointly develop 6.8 acres of leasehold land in South Quay. The land (from SSQ) will be disposed to Prosper Revenue S/B (PRSB; JV co) at MYR59.2m or MYR200psf. Under the SSA agreement, Sunway will appoint four directors to PRSB whilst the remaining two will come from MF.

Who is Mitsui Fudosan? MF is one of the leading listed developers in Japan. It is involved in various types of property developments such as retail, hotel, resorts and logistic facilities across Japan, USA, Europe, Singapore and China. The JV with Sunway will be MF’s third property project in Malaysia, after the Mews project with E&O at Jalan Yap Kwan Seng and an outlet mall at KLIA (phase 1 scheduled to open in 4Q14).

A positive development. The JV will allow Sunway to tap into MF’s existing clientele base (c.300,000 Japanese customers) and internationalize the Sunway brand. It will raise Sunway’s profile among the Japanese community. The land will be developed into two blocks of condominiums (totalling 472 units) to be known as Sunway Geo Residences (part of Sunway Geo integrated development) worth MYR319m in GDV (MYR850psf ASP; >70% bookings for 1st  block).

Muted impact on earnings. We maintain our FY13-15 core earnings forecasts. Net disposal gain (likely to be immaterial) from the land sale will be recognized progressively, we understand. Our RNAV estimate remains intact at MYR4.36 after factoring in this latest JV project. The premium valuation of +0.1x to its historical P/RNAV mean to derive our TP is to reflect Sunway’s more diversified earnings base.

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