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)

Online group purchase Dell computer at lower price with Dell Swarm

If you plan to buy a Dell computer (either laptop or desktop) with Intel processor (oops, not for AMD), you can possibly get it at a lower price in Dell Swarm website.

Dell Swarm Malaysia is an innovative website to enable anyone residing in Malaysia to group purchase computers with Dell Malaysia.

The group purchase option is called a Swarm, and will active for 72 hours (3 days) for buyers to place order. The more buyers swarm for it (up to a maximum of 15 committed buyers per Swarm), the more discount they will get. Buyers can also pledge for a lower price, and they'll get it if more buyers join the Swarm. Once the price is lowered as they wish, they'll become committed buyers then.

The price will be finalized when the Swarm ended, all buyers will get the same lowest price resulting from number of committed buyers as well as their pledging effort to bring the price further down. The buyers will get a unique coupon code via email, and they can proceed to Dell Malaysia's website to customize the items and place the order.

If you don't see a Swarm with the computer specs that you want, you can suggest for a new one by specifying your specs, and get your supporters to follow your suggestion. Every 2 weeks, the most popular suggested Swarm will be chosen to become an active Swarm.

You might also probably be interested with:

• Buying Dell computer online with Dell Coupon codes for more discount

Impact of IFRIC 15 on property stocks

If you have any property stock in your portfolio, or you plan to buy any property stock, I have a very important message to share with you.

 

Malaysia will implement a new accounting standard named as IFRIC 15, an interpretation issued by the International Financial Reporting Interpretations Committee (IFRIC) effective 1 July 2010. IFRIC has named this interpretation "Agreements for the Construction of Real Estate", which, what you guess is correct -- it will affect the accounting system of all the property developers.

 

This radical change was made in response to criticisms from international investors and analysts that the current financial statements were inconsistently presented as well as being overly aggregated.

 

Currently, it is a normal practice that property developer charge for progressive payments based on percentage of completion of the project, and once the developer received the payment (normally from the bank which the buyer financed for the property, or directly from the buyer if the property is bought in cash without financing), the amount of money will be booked into the accounting system of the developer as revenue received. For public listing property stocks, this revenue will be reported in their Quarterly Report, and is used to calculated their profit & loss.

 

Under IFRIC 15, there is possibility that the property developer can only recognise this revenue at a lump-sum after the property is 100% completed and handed over to the buyer.

 

Although IFRIC 15 clarifies that there is possibility for the "percentage of completion method" can be applied, it is unlikely in many jurisdictions that many agrrangements will meet the necessary criteria. Therefore, such arrangements will result in "deferring recognision of revenue until construction is complete", which affect the profit/loss booking in accounting.

 

The greatest impact to property developers from this deferred recognision of revenue is that, we would see zero revenue generated in a project before its completion, and there are cost - labour, materials, project management, sales & marketing, etc. incurred during construction period. With zero revenue recorded but all the cost recorded, the P&L statement will show a red figure of lost.

Then, when the property is completed and handed over, there will be a surge in revenue. By that time, the cost is also minimal as the construction has already completed. We will probably see a sudden big gain in the P&L then.

Although this is a drastic change in accounting, bear in mind that there is nothing change in the fundamental of the business, as well as the cash flow of the company. This might cause confusion to investors if not handled properly.

We can foresee that in case this happened:

• Property developers who focus on highrise building (which normally development period is 3 years) are more affected than property developers who focus more on landed property (which normally the development period is 2 years).
• Property developers who have large landbanks and a lot of development projects concurrently ongoing, are less affected than those with only a few projects running, as they can strategically schedule the development completion time more effectively.
• Property stocks who also have other type of business (such as property management, plantation, mining, etc.) are less affected than those who only involved in property development.

It is reported that the Real Estate and Housing Developers' Association (REHDA) of Malaysia has set up a task force to address and minimize issues arising from Malaysia's adoption of this IFRIC 15.