Sunway - Another Iskandar Malaysia venture HOLD

-  It was announced to Bursa Malaysia yesterday that Sunway has formed a 60:40 JVCo with Iskandar Investment Bhd (IIB) to jointly develop a land with a size of 779.1 acres in Sungai Pendas within Iskandar Malaysia. 

-  To be exact, this land is located adjacent to its maiden acquisition in Iskandar, i.e. next to Medini Zone F. Given that this is outside the Medini zone, this landbank enjoys freehold status, albeit not entitled to any tax incentives. 

-  This land would cost up to RM413mil or a cheap RM12.16psf, whereby the JVCo is given a deferred payment incentive over 5 to 10 years for the remaining 90% of the land cost.

-  The significance of this land deal is that not only Sunway’s exposure to Iskandar would double to 1,558acres, but more importantly, Sunway would be able to complement the two developments. 

-  We gather that as opposed to Sunway Medini, this new landbank (GDV: RM12bil) would comprise mostly commercial properties with a development mix of 70:30. Sunway and its partner would be re-drawing the masterplan although the maiden launch for Sunway Medini is on track for 3QFY13/4QFY13. 

-  Assuming a plot ratio of 1.5x, an efficiency ratio of 70% and a construction cost of RM200psf, the project would have a break-even cost of RM297psf. At a conservative average selling price of RM450psf the JVco would be able to yield a solid margin of 33%-34%. We also estimate this land deal to add about RM0.40/share to our SOP value or about an 11% increase, and about RM105mil in PBT yearly.

-  As a whole, we view this deal positively mostly on account of an attractive land cost, the deferred payment scheme, freehold status, and close proximity to Linkedua. However, we are slightly wary of the magnitude of the development which would mostly cater to Singaporeans and PRs in Singapore. However, we acknowledge that there is a growing expat community within Nusajaya which provides a promising sign. 

-  We reaffirm our HOLD rating on Sunway Bhd, with our fair value unchanged at RM2.60/share based on a 25% discount to our SOP value of RM3.50/share. We are keeping our numbers unchanged pending the redrawing of the masterplan.   

Source: AmeSecurities