Sunway’s joint venture to significantly increase exposure to Iskandar Malaysia

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KUCHING: Sunway Bhd’s (Sunway) recent joint venture with Iskandar Investment Bhd (IIB) to jointly develop a land with a size of 779.1 acres in Sungai Pendas within Iskandar Malaysia will significantly increase the former’s exposure to the regional development corridor.

The group announced a 60:40 joint venture company (JVC) with IIB in which the land, with a potential gross development value (GDV) of RM12 billion, 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 (its first landbank within Iskandar Malaysia) was on track for the third quarter (3Q) or 4Q of financial year 2013 (FY13).

AmResearch Sdn Bhd (AmResearch) yesterday noted, “This land would cost up to RM413 million or a cheap RM12.16 per square foot (psf), whereby the JVC is given a deferred payment incentive over five to 10 years for the remaining 90 per cent of the land cost.

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

The research house added that assuming a plot ratio of 1.5 times, an efficiency ratio of 70 per cent 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 JVC would be able to yield a solid margin of 33 to 34 per cent, it pointed out.

Meanwhile, HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) stated that after the completion of the acquisition, Sunway would increase its total landbank to 3,580 acres, with total GDV of RM43 billion.

“Out of its 3,580 acres of land, 1,534 acres or 43 per cent of its landbank is located in Johor, while the Klang Valley has 826 acres or 23 per cent.

“In terms of GDV, Johor will account for 58 per cent of the group’s total GDV, while Klang Valley will account for 23 per cent.

“This means that the group is now banking on the growth of Iskandar to drive its property development division going forward,” the research house opined.

RHB Research Institute Sdn Bhd (RHB Research) believed the development would mirror the Bandar Sunway ( more than 600 acres) in the Klang Valley, and Sunway would “be able to capitalise on the surrounding natural greeneries and the river for its design, incorporating some riverfront developments.”

It had also noted some risks and concerns to the development in the form of rising building input costs; delays in approvals and launches; new contracts secured in FY12/10-12 coming in below its in-house target as well as ‘country and macro risk’.

RHB Research kept its earnings forecasts unchanged, as “the development on the land is not expected to start over the short term”.

It raised the sum-of-parts (SOP) derived fair value 10sen to RM3.08 per share, based on 30 per cent discount to revised net asset value, after incorporating the incremental value from the new land.

AmResearch, while positive on the deal ‘”mostly on account of an attractive land cost, the deferred payment scheme, freehold status, and close proximity to Linkedua”, maintained the fair value unchanged at RM2.60 per share based on a 25 per cent discount to its SOP value of RM3.50 per share.

“We are keeping our numbers unchanged pending the redrawing of the masterplan. We also estimate this land deal to add about 40sen per share to our SOP value or about an 11 per cent increase, and about RM105 million in profit before tax yearly.”

HwangDBS Research also viewed the deal positively due to the ‘cheap purchase price and favourable payment schedule’ but it added, “We think that there will only be material contribution from this development several years down the road.”

As such, it maintained the stock’s target price at RM2.55 per share, based on a 10 per cent discount to the SOP valuation “due to a lack of near-term catalysts.”