Sunway - Emerging Iskandar proxy – 1,800 acres in Nusajaya HOLD

- We reaffirm our HOLD rating on Sunway Bhd (Sunway) with our fair value unchanged at RM2.60/share, assigning an 25% discount to our SOP value of RM3.50/share.

- It was announced that Sunway had signed an agreement with Iskandar Investment Bhd (IIB) to co-develop a piece of freehold land – 300acres - in Pendas or specifically Eastern Pendas South (EPS). The land would be acquired for RM183.9mil or translating to about RM14psf which is fair given it is just a tad higher than Pendas North &South land (RM12.20psf). This land is expected to have a GDV of RM6bil. 

- Taking into account the latest acquisition, Sunway’s total landbank in Iskandar Zone B now adds up to about 1,770acres with a combined GDV of RM30bil. To recall,  this comprises of (1) Medini Zone F – 691 acres (2) Pendas North & South – 779.1acres and (3) Eastern Pendas South – 300acres

- We understand the launch within the Pendas land would not take place until possibly 2QFY14 given the need for JV partners to redraw the master plan. While the Medini and Pendas land would be drawn into a single master plan, the latter requires more detailed planning.

- The significance of this deal is that it provides the missing puzzle to Sunway – the EPS land enables the entire Sg Pendas to be captured within its landbank, enhancing the appeal of the development.

- This land is mooted for an eco-themed development which we believe is an advantage to attract the Singaporean buyers who are looking for bigger space and a niche concept, akin to East Ledang and Horizon Hills. 

- We are also positive that: (1) land cost is attractive – average cost for entire Pendas is RM12.70psf - and is on a deferred payment basis (over 6-10 years) albeit Sunway has to spend quite a bit on infrastructure (2) Little impact to its gearing due to equity accounting (3) The entire Iskandar project would provide a boost of at least 50sen to our SOP – based on a conservative assumption of between 16%-20% development margin

- From a valuation standpoint, Sunway is currently trading at a decent discount of 33% to our SOP value and is also attractive PE-wise, at about 8x FY13F earnings.  

- While this news is positive in light of the strong newsflow in Iskandar, we expect its share price to trade within range given the weak appetite for property stocks amid election risks. Plus, any impact to earnings would only be seen in FY15 at the earliest. 

Source: AmeSecurities