Tuesday, November 23, 2010
Sunway City Or Sunway Holdings? Its A Wabak!
Sigh, wrote the following last night ... was going to post, then found out both were suspended .... sigh...
Following the rerating in UEM Land and Sunrise, we had the MRCB and IJM Land being suspended now pending a material disclosure. Is this rotational play? Rather not I think. Its a pivotal point for the entire market. There is a deep underlying need to rerate many of the property related counters. Its like a wabak, they are like an epidemic, its a tectonic shift one might say. You and your neighbours may be sitting a huge coal deposit for the longest time.
Sunway City and Sunway Holdings have been active for the past few days. Are they headed somewhere higher? Or is this rotational play, which will mean it petering very soon, or forming a false high point very quickly and then fizzling out. My views at the end.
The run up in Sunway City can be attributed partly to the big 28 page CIMB report:
CIMB Research: Suncity is 44% owned by Tan Sri Jeffrey Cheah, 21% owned by Government of Singapore Investment Corp (GSIC) and is a sister company of Sunway Holdings (SGW MK, Not Rated). Suncity can be considered a unique property company as its earnings are well-balanced between development and investment. After the listing of Sunway REIT (SREIT MK, Not Rated) which is now 37% owned, property development is targeted to contribute around 60% of core profits. The group has landbank in excess of 1,400 acres spread throughout the Klang Valley, Perak and Penang. It also has 300 acres of overseas landbank in China, India and Australia. Property investment is targeted to contribute 40% of group profits, coming from numerous hotels, shopping malls, education buildings and theme parks.
The group’s landbank is mostly in prime locations in the Klang Valley, the most important ones in terms of gross development value (GDV) being the RM5.2bn Sunway South Quay in Bandar Sunway, the RM3.6bn Sunway VeloCity in Kuala Lumpur and the RM2.7bn Sunway Damansara in Kota Damansara. The Klang Valley houses 34% of the group’s landbank while the largest single piece of land is the project in Ipoh which makes up 43% of the total landbank. Overseas
projects in Australia, India and China comprise 15% of the landbank but a larger 26% of GDV. The most significant is the RM5bn project in Tianjin, China and the RM950m Hyderabad project in India.
Of the total GDV of RM21bn, 59% is from the Klang Valley, 6% from Penang and 2% from Perak. A significant 33% is from overseas, with China making up 25% of group GDV, India 5% and Australia the remaining 3%.
SunCity is one of the very few Malaysian property companies that have significant property investment assets. The only other major property developer with substantial investment properties is IGB Corp (IGB MK, Not Rated). SunCity’s assets are located mostly in Bandar Sunway but the group also has a shopping mall on mainland Penang, a hotel in Cambodia and a hotel in Vietnam. All in, it has six hotels (two in the Klang Valley, two in Penang and one each in Cambodia and Vietnam), three shopping malls (two in the Klang Valley and one in Penang), two themes parks (one in the Klang Valley and one in Ipoh), one medical centre (in the Klang Valley) and two college buildings (both in the Klang Valley).
Management dynamics - SunCity ranks third after SP Setia and Mah Sing in terms of property development dynamics. In the raw material inputs category, SunCity scores highly in all areas as it has a strong track record of acquiring strategically located land bank and providing good accessibility. It scores moderately in the business operations category because its track record for sales is patchy and often swings with the business cycle, unlike SP Setia or Mah Sing which have managed to push out sales in good times and bad. SunCity also scores moderately in the marketing proficiency category as its strong brand name and product differentiation are offset by occasional delays in reacting to market conditions. In terms of financial planning, SunCity scores reasonably high as the strengthening of its balance sheet after the listing of Sunway REIT puts it in an enviable position to take advantage of expansion opportunities.
Industry SWOT analysis - SunCity also scores relatively well in terms of relative industry SWOT analysis. Its beefed-up balance sheet, strong ability to acquire strategically located land throughout the Klang Valley and professionalism stand out. On the flip side, its track record in terms of earnings and property development sales is more erratic, which can be a significant negative in terms of earnings predictability. The group also scores well in terms of its ability to take advantage of opportunities. This will be even more the case going forward given that it now owns the largest REIT in the country which is hungry for acquisitions. SunCity should not disappoint on that front as it is undertaking the development of numerous office and retail buildings in the Klang Valley alone. The threats to the group remain the economic and property cycles, which could cause earnings to swing. Should the group manage to execute successfully its overseas projects, the domestic volatility could be reduced.
FD RNAV of RM5.86 and 23% discount to NTA of RM5.21. We initiate coverage on SunCity with an OUTPERFORM call and RM5.27 target price based on 10% discount to RNAV. Potential re-rating catalysts include 1) robust sales due to continued strong demand for properties, 2) the successful launch of new projects in China and India, and 3) steady pipeline of investment properties to inject into Sunway REIT.
OSK Research: With the cash freed up from its REIT, we believe that SunCity (NR) can now undertake more developments. The company has been awarded RM968m worth of contracts from its sister company, SunCity, over the past 5 years. We understand that SunCity has another RM1bn-1.5bn worth of jobs to be tendered out within the next year. These include: (i) Sunway office tower, (ii) Monash Uni extension, (iii) Sunway Medical Centre extension, and (iv) an office tower in KL.
The 65:35 Sunway-Dasa Group JV will be embarking on a mixed development in Colombo, Sri Lanka comprising 70 commercial and 180 residential units with a GDV of USD250m. Management expects the launch to take place in 2Q2011 and is guiding for PBT margins at a lucrative 20%. The group will enjoy a 5-year tax holiday once the project is completed in 2014. We are positive on its maiden Sri Lankan venture as the country’s recent political stability has spurred property prices.
My Views: These two stocks have been quite popular for the last few months. Many fundamental players have been buying in dribs and drabs but both shares did not move very significantly because the big fishes have not been keen on Malaysian equities in general. Sometimes we can get the 10%-20% gain even when the big fishes stay out. One must not be too angry about it, even though you may have been a tad early in discovering them, you may not get the big returns.
Hence when the platform shifts and the liquidity shift occurs, we need to reassess these stocks in the new light. Both are great trading buys.
Sunway Holdings' key is that its EPS growth in 2010 and 2011 will be a staggering 24% and 27% respectively, and supposed to breach 30% growth for 2012. How to go wrong here??? They get a large chunk of work from Sunway City anyway. Even RM3.00 is deemed as cheap to me for Sunway Holdings.
As for Sunway City, this is going to rock our socks off. The average P/BV for top players in the market for property stocks is around 2.0x. They are at 0.8x??????????????? Why .... Let's not look at why first. Sunway City has as good a landbank as any top local players. Yes, you may want to put in some discount because they have some overseas projects, even then should these overseas projects be even subjected to a discount in the first place??? They have a good stake in Sunway REIT which will provide good recurring income and will also act as an outlet for them to realise deep value in investments. So, is it that Sunway City is a second rate property player, of course not!!!
Yes, its not overly big ... yet. Its branding is good to superior. The brand is extracting value by expansion overseas. No matter how you cut it, its should not be below 1.0x.
Let's use NTA of RM5.21 and not the RNAV. I would not be surprised if it goes to 2.0x P/BV = RM10.42. Seems Repcoish doesn't it? Let's not be overly optimistic. I will wait for the reasons why they are not at 2.0x, you can supply the reasons as well: it could be that EPF or PNB or LTH etc. are not a sizable owner .... hhmmmm, why??? ... it could be that foreign funds are not in the local equity market for the longest time. We know the second part has improved markedly of late, I will be conservative a bit la and put a P/BV of 1.5x for a 6 month target = RM7.81.
These are just my blogging thoughts, don't use this without doing your own research.
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