Sunway Bhd
(Dec 5, RM2.31)

Maintain add at RM2.30 with a target price of RM2.55: Sunway announced that on Tuesday it formed a joint venture (JV) company with Iskandar Asset Sdn Bhd (IASB), a wholly-owned subsidary of Iskandar Investment Bhd (IIB), to jointly develop a mixed integrated project in Iskandar Malaysia.

Harmony Impulse Sdn Bhd (60% owned by Sunway, 40% by IASB) will buy from IASB two parcels of freehold land measuring a combined 315.2ha for up to RM412.7 million (RM12.16 per sq ft). Based on the preliminary plan on the drawing board, Harmony Impulse will develop RM12 billion worth of properties over a period of 17 years.

The 315.2ha tract is located next to IIB’s Medini project near the Second Link Bridge. Sungai Pendas divides the land into  two parcels — Pendas North (167.1ha) and Pendas South (148.1ha). Importantly, Pendas North borders the Sunway- Khazanah Nasional Bhd Medini Zone F land, a 279.6ha tract acquired by the Sunway-Khazanah JV in December 2011 to be developed into a RM12 billion mixed development. Phase 1 is scheduled for launch at end-2013.

We are positive on the business venture because:

(i) we are generally optimistic on the long-term prospects of Iskandar Malaysia;
(ii) the land acquisition cost of RM12.16 psf is attractive, a discount to the RM13 to RM210 psf range paid by peers for neighbouring land due to less developed infrastructure and the absence of Medini incentives;
(iii) after paying a 10% deposit, the balance will be paid in 10 instalments over a period of 10 years, thereby easing the cash flow and interest burden on Sunway;
(iv) a strong JV partner in IIB, the strategic developer involved in the planning and execution of major catalytic projects in Iskandar Malaysia; and
(v) post acquisition, Sunway will be among the largest landowners (after UEM Land) with over 594.8ha of strategic landbank in Nusajaya.

We make no change to our earnings forecast, “add” recommendation and target price of RM2.55, based on a 40% discount to realisable net asset value.

While we are positive on the proposed business venture, we do not expect Harmony Impulse to have any material impact on Sunway’s bottom line over the next two to three years. We expect the re-rating to kick in when the group reveals further details of the master plan and the project’s launch pipeline. — Affin IB Research, Dec 5

This article first appeared in The Edge Financial Daily, on Dec 6, 2012.