Sunway’s free warrants attractive on enhanced value

KUCHING: Sunway Bhd’s (Sunway) free warrants have been viewed by the research arm of Hong Leong Investment Bank Bhd (HLIB Research) as the firstof-its-kind fixed annual step-down mechanism will enhance the value of warrants.

Last week, Sunway issued a circular on Bursa Malaysia detailling the proposed bonus issue and free warrants. Compared to ordinary free warrants, HLIB Research said Sunway’s free warrants are attractive as the first- of- its- kind fixed annual step-down mechanism of RM0.07 will enhance the value of warrants.

“For ordinary warrants, a dividend entitlement on the underlying mother share would reduce the value of the warrants,” the research arm said in a company insight.

“However, with the step-down mechanism (which is akin to a fixed adjustment of dividend payment to underlying), the value of warrant would be unaffected (if the quantum of step-down is equal to the dividend).”

According to HLIB Research, in the case of Sunway, given the annual step-down of RM0.07, the estimated value of the free warrant is RM0.62 (post-bonus issue adjustment) based on Binomial Option Pricing Model, representing a premium of 34 per cent.

However, the estimated value of warrants could fetch as high as RM0.73 if based on the research arm’s target price of RM5.04 per share.

HLIB Research noted that the step-down of seven sen is higher than its projected dividends for financial year 2018 (FY18) and FY19 at 4.6 sen and 4.9 sen (post bonus issue adjustment) per share, respectively. It further noted that the higher quantum of step-down compared to dividend projection could further enhance valuation of the warrants.

The research arm gathered that while Sunway has no immediate plan to utilise the proceeds (approximately RM1.15 billion assuming full conversion) from the conversion of warrants.

“Hence, any proceeds raised will be used for future working capital or deleveraging,” it said.

Overall, Sunway remained HLIB Research’s top pick within the sector as the research arm believed the stock should be rerated and trade closer to its peers such as IJM Corporation Bhd and Gamuda Bhd given its diversified income stream and declassification from property sector.

At a price-earnings (P/E) of 13.9-fold as compared to peers, the research arm said Sunway represents a deep value stock with potential assets unlocking and growing healthcare business which are underappreciated.