SUNWAY : Maintain hold at RM3.90 with fair value of RM4.13

Sunway City — limited upside to stock

Sunway City Bhd
(Oct 4, RM4.02)
Maintain hold at RM3.90 with fair value of RM4.13: We are maintaining our “hold” rating on Sunway City (SunCity) with our fair value revised to RM4.13 per share based on a 30% discount to its revised NAV estimate of RM5.90 per share.

We see value in this company, and our call is premised on: (i) Limited upside to the stock as share price has gained 20% this year; (ii) Valuation is a bit stretched — FY11F fully diluted PER of 14 times against the sector average of 10 or 11 times; (iii) 50% of gross development value (GDV) (RM2.6 billion) of planned launches in 2011 are made up of overseas and non-key projects.

Following our visit, we are more convinced about Sunway Velocity and Damansara, which have a combined GDV of about RM600 million.

Management has guided strong interests in its Velocity shop office units. We think a lack of new and quality commercial development in the area will drive demand.

Similarly, healthy demand for commercial lots in Damansara will be driven by the heavy traffic volume in the vicinity and wide catchment area.

But going forward, launches for 2011 are a bit of a mixed bag. About 50% of planned launches in 2011 are overseas projects. Domestic projects are smallish, non-high conviction ones, for example Ipoh and Melawati.

While SunCity has done well with its maiden China project — 80% take-up — we are neutral at this juncture as the development value is insignificant at RM114 million. The market will only re-rate the stock upon seeing significant contribution from overseas.

With the successful listing of SunREIT, the group is now in a strong position to gear up for land acquisitions. The group received net proceeds of RM500 million — after settling its debt (about RM800 million).

We view a recent land deal in Penang positively, but we think landbanking in the Klang Valley would be challenging now given scarce supply of prime pockets of land.

That aside, management has already stated that it is keen to be involved in the redevelopment of RRI land in Sungai Buloh.

We are revising our earnings estimates to RM176 million to RM207 million for FY10F to FY12F following the listing of its REIT unit, and adjusting for new landbank in Penang and increased stake in Sunway Lagoon unit.

Sunway City is currently trading at 34% discount to our NAV estimate of RM5.90 per share, which we think is justified. — AmResearch, Oct 4

This article appeared on the Live it! page, The Edge Financial Daily, October 5, 2010.