Property 20 December 2011 KDN: PP 10251/07/2012(030525) Company Update Sunway Bhd SWB MK RM2.37 BUY (maintain) Price Target: RM2.79 ( ) 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Aug-11 Sep-11 Oct-11 Nov-11 Price Performance 1M 3M 12M Absolute +0.9% +20.9% na Rel to KLCI -0.7% +15.4% na Stock Data Issued shares (m) 1,292.5 Mkt cap 3,063.2 Avg daily vol - 6mth (m) na 52-wk range (RM) 1.67-2.80 Est free float 40% NTA/share (RM) 1.92 P/NTA (x) 1.2 Net cash/(debt) (3Q11) (1,305) ROE (FY11E) 12.6% Derivatives Warr 2016 (WP: RM0.575, SP RM2.80) Key Shareholders Tan Sri Jeffrey Cheah 48.1% GIC 12.2% Earnings & Valuation Revisions 11E 12E 13E Prev EPS (sen) 23.1 25.5 27.9 Curr EPS (sen) 23.1 25.5 27.9 Chg (%) - - - Prev target price (RM) 2.79 Curr target price (RM) 2.79 Isaac Chow (603) 2145 0412 Isaac cschow@affininvestmentbank.com.my Chow (603) 2145 0412 cschow@affininvestmentbank.com.my Moving big into Medini Iskandar JV with Khazanah to develop 691 acres of land in Medini, Iskandar Malaysia Sunway announced that its wholly-owned subsidiary, Sunway City Sdn Bhd had on 19 December 2011 entered into a Subscription and Shareholders Agreement with Khazanah to establish a joint venture company to acquire and develop 691 acres of land in Medini, Iskandar Malaysia. The JV company, Semerah Cahaya Sdn Bhd has also on even date, entered into a conditional Lease Purchase Agreement ( LPA ) with Global Capital & Development Sdn Bhd for the acquisition of the lease for the 691 acres of land for RM745.3m (RM24.73 psf). The land has a 99-year lease, commencing in 2012. Information on the land The land is located in Zone F, South of Medini Iskandar, within the Medini Living development cluster. The land borders a mangrove forest and the Straits of Johor. Other property developments in Medini are E&O s wellness township project in Medini Central, WCT s 1Medini residential project in Medini North, WCT s commercial project in Medini Business District, Bina Puri s SOHO and retail development project at Medini North and UEM Land s Lifestyle Retail Mall and Residences@Medini North that will be directly connected to Legoland. Based on its preliminary plan, the Sunway-Khazanah JV company intends to develop the land into an integrated development comprising both residences (65%) and commercial (35%) properties with an estimated GDV of RM12bn. Based on 1x plot ratio, the RM12bn GDV will translate into property selling prices of approximately RM400 psf. The JV company targets to launch the project in 2013. JV structure and funding requirements The JV company s Board of Directors, EXCO and tender committee members comprise nominees of Sunway and Khazanah while the management team and project management company will be appointed by Sunway. The initial equity investment in Semerah Cahaya (JV company) is RM360m, where Sunway will contribute RM136.8m (38%). Sunway will subsequently subscribe for additional shares via 4 annual tranches of RM49.5m/year, commencing on the 18 th month of the date of the LPA. The final equity investment in the JV company (after the 4 annual tranches) will be RM558m, where Sunway will have a 60% equity stake, Khazanah 40%. Sunway intends to finance the investment via internally generated funds and external borrowings. As at end-september 2011, Sunway s net gearing ratio was 0.46x (RM954m gross cash, RM2,259m total borrowings). The group will consider various options, including rights issue to finance the Medini development. Earnings & Valuation Summary FYE Dec 18M2009 2010 2011E 2012E 2013E Revenue 4,150.4 3,134.5 3,807.5 3,709.3 3,810.0 EBITDA 1,453.4 672.1 400.1 418.2 442.5 Pretax profit 1,289.4 717.3 441.0 425.6 463.2 Net profit 643.5 688.2 343.0 330.2 361.1 EPS (sen) 49.8 53.2 26.5 25.5 27.9 PER (x) 4.8 4.5 8.9 9.3 8.5 Core net profit 223.0 325.0 298.6 330.2 361.1 Core EPS (sen) 17.3 25.1 23.1 25.5 27.9 Core EPS chg (%) (2.6) 45.7 (8.1) 10.6 9.4 Core PER (x) 13.7 9.4 10.3 9.3 8.5 DPS (sen) - - 7.0 8.0 9.0 Dividend Yield (%) - - 3.0 3.4 3.8 EV/EBITDA (x) 3.2 6.7 10.8 10.3 9.8 Consensus profit - - 322.6 350.6 399.1 Affin/Consensus (x) - - 1.1 0.9 0.9 Important disclosures at end of report Page 1 of 6
We are positive on the business venture We are positive on the business venture: (i) we like the bright long-term prospects of Iskandar Malaysia. While the current pace of new property developments and project take-ups in Iskandar Malaysia is still slow, we believe the activities will pick-up in 3-5 years time with the commencement of major infrastructure projects and more vibrant tourism, educational and manufacturing activities; (ii) the Medini incentives (exemption from imposition of Bumiputra quota, exemption from low cost housing requirement, exemption from minimum threshold of RM500,000 in respect of foreign acquisitions and income tax exemption on disposal of land, sales or rental of buildings (for approved developer status)) will raise the project s profitability; (iii) Sunway s land acquisition cost of RM24.73 psf is attractive, lower than the price paid by E&O (RM38 psf) and UEM Land (RM65 psf); and (iv) the acquisition will help to diversify Sunway s geographical spread, increase total land bank by 30% to 2,798 acres and increase its total GDV by 49% to RM32.7bn. Assuming a development period of 15 years, the Medini project may generate an annual effective revenue of up to RM500m roughly 14% of FY12 group revenue. Maintain BUY with an unchanged TP of RM2.79 We maintain our FY11-13 earnings forecast for Sunway, as the Medini project will only be launched by 2013 and contributions will only kick-in thereafter. Maintain BUY on Sunway with an unchanged TP of RM2.79, based on a 30% discount to RNAV. Notwithstanding our cautious stance on the domestic medium-to-high end property market in view of the rising global economic uncertainties and potential tightening of bank mortgages, we continue to like Sunway for its: (i) integrated real estate business model; (ii) strategic land bank; (iii) extensive experience in construction sector with proven track record; and (iv) established international footprint in Singapore and China (property development) and Middle East (construction). Besides, we believe Sunway s short-to-medium term earnings will be cushioned from any unexpected shortterm market downturn given their high property unbilled sales of RM2bn, construction orderbook of RM2.9bn and recurring income from the Sunway REIT and its themepark operations. Fig 1: Nusajaya location map Source: UEM Land Page 2 of 6
Fig 2: Location of the 691 acres Medini land bank Source: Sunway Page 3 of 6
Fig 3: Sunway s sum-of-parts valuations Type De scription Property Development Stake Acres GDV NPV @ 8% Surplus Sunw ay South Quay 60% 52 3,893 404.9 243.0 Sunw ay Velocity 50% 22 3,191 331.9 166.0 Damansara 60% 18 826 92.3 55.4 Integrated Resorts 100% 18 660 0.0 0.0 Melaw ati 100% 31 555 57.7 57.7 Sunw ay Tow ers KL 100% 1 240 22.1 22.1 Taman Duta 60% 3 120 11.9 7.2 Casa Kiara 80% 3 230 21.2 16.9 Suria 50% 14 60 4.8 2.4 Johor 80% 64 932 83.1 66.5 Penang Grp 100% 108 1,202 108.9 108.9 Semenyih 70% 398 729 56.2 39.3 Ipoh 65% 899 286 29.7 19.3 Taman Equine 100% 33 250 26.0 26.0 Bangi 100% 3 59 6.1 6.1 Melaw ati 2 100% 2 43 4.5 4.5 Sg Long 80% 111 277 25.1 20.1 Mont Putra 100% 163 156 12.1 12.1 Others (Malaysia) 77% 12 38 4.1 3.2 Yishun, Singapore 30% 7 851 76.1 22.8 Tampines, Singapore 30% 5 1,070 95.7 28.7 Yuan Ching Road, Singapore 30% 5 828 74.1 22.2 Sembaw ang, Singapore 100% 1 75 7.2 7.2 Tianjin, China 60% 102 5,000 346.4 207.9 Jiangyin, China 39% 17 454 58.5 22.8 Opus, India 50% 35 745 64.3 32.1 MAK, India 60% 14 181 17.9 10.8 Australia 31% 91 612 70.7 21.9 Sri Lanka 65% 1 250 18.6 12.1 Effective unbilled sales 179.4 Subtotal: 2,233 23,813 2,132 1,444.6 Property Investment Stake Book Value Mkt Value Surplus Monash University Campus 100% 200.0 200.0 0.0 Sunw ay University College & Residenc 100% 219.0 220.0 1.0 Sunw ay Giza 60% 38.0 38.0 0.0 Subtotal: 1.0 REIT Stake Book Value Mkt Value Surplus Sunw ay REIT @ RM1.12 per unit 36.7% 893.1 1,105.4 77.9 Subtotal: 77.9 Other business RMm Construction @ 12x FY12 PER 587.3 Other business @ 10x FY12 PER 750.0 Subtotal: 1,337.4 Total 2,860.9 Shareholders' Fund @ Dec, 2010 2,595.8 Warrants conversion 723.8 RNAV 6,180.5 Enlarged shares base (m) 1551.0 Fully diluted RNAV per share (RM) 3.98 Discount (%) 30% Fair value per share (RM) 2.79 Source: Affin Page 4 of 6
Sunway Bhd FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Dec 18M2009 2010 2011E 2012E 2013E FYE 31 Dec 18M2009 2010 2011E 2012E 2013E Revenue 4,150.4 3,134.5 3,807.5 3,709.3 3,810.0 Grow th Operating expenses (2,697) (2,462) (3,407) (3,291) (3,368) Revenue (%) (5.9) 13.3 21.5 (2.6) 2.7 EBITDA 1,453.4 672.1 400.1 418.2 442.5 EBITDA (%) 5.3 (30.6) (40.5) 4.5 5.8 Depreciation (149.0) (80.0) (87.3) (95.7) (103.5) Core net profit (%) (35.1) 118.6 (8.1) 10.6 9.4 EBIT 1,304.5 592.1 312.8 322.5 339.0 Net int inc/(exp) (145.5) (74.2) (71.6) (65.4) (62.2) Profitability Associates' contribution 130.4 199.3 162.0 168.5 186.4 EBITDA margin (%) 35.0 21.4 10.5 11.3 11.6 Exceptional items - - 37.7 - - PBT margin (%) 31.1 22.9 11.6 11.5 12.2 Pretax profit 1,289.4 717.3 441.0 425.6 463.2 Net profit margin (%) 15.5 22.0 9.0 8.9 9.5 Tax (308.5) 280.2 (75.7) (71.3) (76.1) Effective tax rate (%) 23.9 (39.1) 17.2 16.8 16.4 Minority interest (337.5) (309.2) (22.4) (24.2) (26.1) ROA (%) - 53.0 12.6 11.1 11.3 Net profit 643.5 688.2 343.0 330.2 361.1 Core ROE (%) - 12.5 11.0 11.1 11.3 Core Net Profit 223.0 325.0 298.6 330.2 361.1 ROCE (%) - 12.0 6.2 6.3 6.5 Dividend payout ratio (%) - - 26.4 31.3 32.2 Balance Sheet Statement FYE 31 Dec 18M2009 2010 2011E 2012E 2013E Liquidity Fixed assets - 2,218.6 2,331.3 2,435.6 2,532.1 Current ratio (x) - 1.5 1.5 1.4 1.4 Other long term assets - 1,795.6 1,942.6 2,094.2 2,261.6 Op. cash flow - 461.7 473.1 324.1 247.0 Total non-curr assets - 4,014.2 4,273.9 4,529.8 4,793.7 Free cashflow - 461.7 273.1 124.1 47.0 FCF/share (sen) - 35.7 21.1 9.6 3.6 Cash and equivalents - 868.5 984.4 872.0 721.7 Stocks - 301.5 365.4 377.5 406.9 Asset management Debtors - 1,142.9 1,385.0 1,430.7 1,542.3 Debtors turnover (days) - 133.7 133.7 133.7 133.7 Other current assets - 697.8 538.1 482.7 537.6 Stock turnover (days) - 35.3 35.3 35.3 35.3 Total current assets - 3,010.8 3,272.8 3,162.9 3,208.5 Creditors turnover (days) - 189.2 189.2 189.2 189.2 Creditors - 1,379.9 1,708.6 1,753.5 1,892.3 Capital structure Short term borrow ings - 505.5 450.0 400.0 400.0 Net gearing (%) - 56.4 44.4 39.9 38.5 Other current liabilities - 67.9 67.9 67.9 67.9 Interest cover (x) 10.0 9.1 5.6 6.4 7.1 Total current liab - 1,953.2 2,226.5 2,221.4 2,360.1 Long term borrow ings - 1,826.3 1,800.0 1,700.0 1,600.0 Other long term liabilities - 263.8 263.8 263.8 263.8 Total long term liab - 2,090.1 2,063.8 1,963.8 1,863.8 Shareholders' Funds - 2,595.8 2,848.3 3,075.1 3,319.8 Minority Interest - 385.8 408.2 432.4 458.5 Cash Flow Statement FYE 31 Dec 18M2009 2010 2011E 2012E 2013E Profit before tax - - 441.0 425.6 463.2 Depreciation & amortizatio - - 87.3 95.7 103.5 Working capital changes - - 182.5 42.5 (57.2) Associates' contribution - - (162.0) (168.5) (186.4) Others - - (75.7) (71.3) (76.1) Cashflow frm ops - 461.7 473.1 324.1 247.0 Capex - - (200.0) (200.0) (200.0) Disposal/(purchases) - - - - - Others - - 15.0 17.0 19.0 Cash flow frm inv't - 2,035.0 (185.0) (183.1) (181.0) Debt raised/(repaid) - - (81.8) (150.0) (100.0) Equity raised/(repaid) - - - - - Dividends paid - - (90.5) (103.4) (116.3) Others - - - - - Cash flow frm fin. - (2,266) (172.3) (253.4) (216.3) Free Cash Flow - 461.7 273.1 124.1 47.0 Page 5 of 6
Equity Rating Structure and Definitions BUY Total return is expected to exceed +15% over a 12-month period TRADING BUY Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals are (TR BUY) not strong enough to warrant a Buy call. This is to cater to investors who are willing to take on higher risks ADD Total return is expected to be between 0% to +15% over a 12-month period REDUCE Total return is expected to be between 0% to -15% over a 12-month period TRADING SELL Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals are (TR SELL) strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks SELL Total return is expected to be below -15% over a 12-month period NOT RATED Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Investment Bank Berhad ( Affin Investment Bank ) based on sources believed to be reliable. However, such sources have not been independently verified by Affin Investment Bank, and as such Affin Investment Bank does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within Affin Investment Bank, including investment banking personnel. Reports issued by Affin Investment Bank are prepared in accordance with Affin Investment Bank s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall Affin Investment Bank, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of Affin Investment Bank as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. Affin Investment Bank and/or any of its directors and/or employees may have an interest in the securities mentioned therein. Affin Investment Bank may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Affin Investment Bank s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of Affin Investment Bank. Affin Investment Bank is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. Affin Investment Bank Bhd (9999-V) A Participating Organisation of Bursa Malaysia Securities Bhd www.affininvestmentbank.com.my Email : research@affininvestmentbank.com.my Tel : + 603 2143 8668 Fax : + 603 2145 3005 Page 6 of 6