Thursday, July 14, 2011

Sunway Bhd: Hold For More Potential Upside

Highlights
# Sunway Hldgs and SunCity will be suspended on 2 Aug 2011 to facility capital reduction and repayment (as part of the merger exercise), following High Court order. We gathered that tentative listing date of Sunway Bhd (the Newco that will assume listing status upon merger) will be on 23 Aug.

# Share and warrant prices of both companies are near or at the offer prices from Sunway Bhd. Investors who have benefited from our initiation reports on SunCity and Sunway (dated 25 and 27 Apr 2011, respectively) would be wondering about the next course of action.

# We believe the market is starting to warm up to the values in Sunway Bhd (as reflected in the slight discounts to offer prices) given that there are still potential upside post merger or listing of Sunway Bhd.

# We estimate that Sunway Bhd RNAV per share is RM4.29 (combining RNAV of both SunCity and Sunway, minus cash outlay and divided by Sunway Bhd’s paid-up capital). Applying a 25% discount to RNAV, Sunway Bhd could be worth RM3.22, 15% above Sunway Bhd issue price of RM2.80.

# In terms of FD P/E, at RM3.22, Sunway Bhd would be trading at 11x-13x FY11-13, not demanding vis-à-vis average P/E of 10-14x and 10-13x for the property and construction sectors respectively. Moreover, this has not factored in potential synergistic benefits post merger. We gathered that initial savings purely from centralizing treasury function and restructuring of borrowings could be circa RM30m over two years, on top of other synergistic benefits.

Pros /Cons
# The merger will create an enlarged entity with higher liquidity which may attract more investors (particularly foreigners), resulting in higher valuations ascribed to Sunway Bhd.

# It will also create synergies, re-articulate the Sunway brand and enhance corporate governance.

Action
# Given the above re-rating catalysts, we believe that the merged entity (Sunway Bhd) has the potential of realizing higher valuations and closer to our conservative estimated worth of RM3.22 (25% discount to FD RNAV). Note that our estimated RNAV and EPS calculations have not factored in any synergistic benefits.

# Thus, Sunway Hldgs and SunCity shareholders could still have potential additional gains of 15-18% (combination of rerating and free Sunway Bhd warrants).

# Maintain our HOLD ratings for Sunway Hldgs and SunCity. Based on yesterday’s closing prices, Sunway-W is the cheapest entry.

Risks
# Sunway Bhd trade below its issue price of RM2.80 upon “relisting”. However, given the deep values and re-rating catalysts, we believe the risk is low.


Source: HLIB Research

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