Neutral on Sunway’s disposal in Singaporean JV
KOTA KINABALU: Analysts are neutral on Sunway Bhd (Sunway) disposing its entire 30 per cent equity stake in Hoi Hup Sunway Novena Pte Ltd (HHSN), for a cash consideration of S$39.88 million, or about RM118.2 million.
The proposed disposal – made by its wholly-owned subsidiary on June 26, 2018 with Hoi Hup Realty Pte Ltd (Hoi Hup) – is expected to be completed by June 30, 2018.
HHSN was formed back in 2012 to undertake the development of a piece of land awarded by the Urban Redevelopment Authority of Singapore for a 99-year lease term at S$492.5 million.
The project named Royal Square at Novena comprises a hotel as well as medical units and retail units which were completed in July 2017 with a take-up rate of 70 per cent and accumulated profit of S$132.5 million.
MIDF Amanah Investment Bank Bhd (MIDF Research) was neutral on the disposal as it noted that the hotel was kept as investment property while 70 per cent of the medical and retail units have been sold.
The proposed disposal will enable Sunway to monetise its investment in HHSN. Nevertheless, Sunway is expected to record estimated disposal loss of S$1 million after taking into consideration of the latest net book value as at March 31, 2018.
On a more optimistic note, Kenanga Investment Bank Bhd’s (Kenanga Research) viewed Sunway’s move as positive as it allows the group to cash out on its investment in the development which was completed in 2017, with proceeds applied to its other projects in Singapore such as Brookvale Park.
“While the disposal is expected to incur a marginal loss of about S$100,000 as it is lower compared to the net book value of S$40 million, Sunway is still entitled for additional compensation should HHSN is able to dispose the remaining unsold medical units at a higher price which exceeds its five per cent margin in 30 months.
“We believe that management will continue with its planned launches of RM2 billion despite the change in the government, maintaining a sales target of RM1.3 billion, which we believe to be achievable, should they launch most of their new projects before the third quarter of 2018,” it opined in a separate report.
Sunway’s unbilled sales of RM0.9 billion with one-year visibility and a vigorous outstanding orderbook of RM6.3 billion will provide visibility over the next twoto three years, Kenanga Research said, while its other divisions are generating decent growth except for quarry operations.
MIDF Research estimated the proceeds from the disposal to reduce Sunway’s net gearing to 0.4times from 0.42 as of 1Q18. The proceeds from the disposal is expected to be used for working capital and new land bank acquisitions.
Meanwhile, earnings impact from the disposal is limited as the disposal loss of S$0.1 million is less than one per cent of our FY18 earnings forecast of RM605.8 million. Hence, we make no changes to our earnings forecast.
MIDF Research maintained neutral on Sunway’s shares with an unchanged target price of RM1.60, while Kenanga Research maintained its market perform call with an unchanged target price of RM1.60.