SunCity looks more attractive than Sunway REIT

The limelight in this quiet month of June 2010, beside the FIFA World Cup soccer tournament, seems to be the IPO of Sunway REIT, so-called the largest REIT listing in Malaysia.

For this IPO, Sunway City (SunCity, 双威城, 6289) will inject 8 of its investment properties with total appraised value of RM3.729 billion into Sunway REIT as shown below.

This injection will be satisfied by RM2.7 billion in cash and 1.025 billion shares in Sunway REIT at RM1.00 par. Upon the completion of the listing of Sunway REIT, SunCity will own about 35% of the issued units subject to the over-allotment option being fully exercised.

Out of the RM2.7 billion cash received from this exercise, SunCity will receive net cash proceeds of RM1.2 billion, while the other RM1.5 billion will go to the other part owners of the 8 assets (mainly Government of Singapore Investment Corporation - GIC).

Although the listing of Sunway REIT will reduce SunCity's shares in the 8 properties from 60.3% to 35%, and therefore will lower down its near term earnings due to dilution of its stakes in those prime assets, the net cash proceeds of RM1.2 billion will effectively cover all its existing debts transforming its gearing ratio from current 0.49 to 0. This will save its borrowing interest cost immediately.

Sunway REIT is estimated to set an IPO price of RM0.97 to retail investors, and RM1.00 to institutional investors. Its NAV stood at RM0.97, which mean retail investors are not going to get any discount to buy its IPO. Its estimated dividend yield is 6.7%, which is comparatively lower than other REITs listed in KLSE.

As such, I think SunCity would look more attractive than Sunway REIT in this IPO. Beside being able to clear all its debt and turn to net cash position, SunCity currently has an unbilled sales of RM630 million.

SunCity is also aggressive in new property developments both locally and overseas. Their local projects including:

• Sunway SPK 3 Harmoni (GDV RM161 million)
• Sunway Rymba Hills (GDV RM270 million)
• Sunway Velocity (GDV RM1.5 billion)
• A’Marine (GDV RM200 million)
• Converting a car park land beside Sunway Pyramid into a 28-storey commercial building with office and retail elements (proposed)
• and more...

And their foreign projects including:

• China - Sunway Guanghao project in Jiangyin (江阴双威广昊综合发展计划) (GDV RM492 million)
• China – Sino-Singapore Tianjin Eco-City project (中国-新加坡 天津生态城, GDV RM5 billion)
• India - Sunway Opus Grand Residency in Ameenpur, Hyderabad (GDV RM1.2 billion)

Apart from these projects in China and India, the company is on the look-out for suitable land in Ho Chi Minh City (胡志明市). It also plans to undertake a joint-venture with Australand to develop 123 acres of industrial property near Sydney, worth about RM800 million.

Despite being affected by the implementation of IFRIC 15, SunCity undeniably looks attractive with improved financial position and aggressive development projects. Not to forget, they still strategically own at least 35% stake in Sunway REIT.

Disclaimer: This article is intended for sharing of point of view only. It is not an advice or recommendation to buy or sell any of the mentioned stock counters. You should do your own homework before trading in Bursa Malaysia.

References and related information:

• ECM Libra (10 May 2010) - Sunway City buy; target price RM5
• OSK Research (10 May 2010) - Sunway City buy; target price RM4.49
• Inter-Pacific (31 May 2010) - Sunway City Bhd outperform; target price RM4.70
• JF Apex Securities (31 May 2010) - Sunway City, Solid 1st quarter results, buy; target price RM4.62
• Kenanga Research (18 Jun 2010) - Sunway REIT - Size Matters (IPO)