Sunway lays groundwork for potential merger and acquisition opportunities
KUCHING: Sunway Bhd (Sunway) is laying the groundwork for potential merger and acquisition (M&A) opportunities with a strengthened balance sheet post the Irredeemable Convertible Preference Shares (ICPS) rights issue exercise, analysts note in an update on the group.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), Sunway’s proposed rights issue of ICPS is expected to raise between RM980.3 million (minimum scenario) to RM1.11 billion (maximum scenario).
Kenanga Research noted that the bulk of the proceeds (RM600 million to RM733 million) will be used to pare down borrowings, which would trim net gearing from 0.43-fold (as of end-March) to 0.34-fold to 0.32-fold on a proforma basis.
“Sunway could subsequently gear up to pursue potential M&A opportunities such as in quarry and property development businesses with additional debt headroom of approximately RM1.7 billion to RM1.9 billion based on a net gearing limit of 0.5-fold,” the research arm said.
“The ICPS – which come with a cumulative preferential dividend rate of 5.25 per cent per annum to be paid at the discretion of the company – will appeal to income-seeking investors amid the prevailing low deposit rates environment.
“While any declaration of preferential dividends will be at the board’s discretions, given the group’s diversified earnings base, we reckon Sunway is in a position to pay dividends to the ICPS holders, with a maximum payout of RM58.4 million (5.25 per cent X1.11 billion ICPS) accounting for only nine per cent of financial year 2021 (FY21E) predistribution net profit.
“At the same time, it will still be able to maintain its minimum dividend payout policy of 20 per cent of core net profit to the ordinary shareholders.”
Kenanga Research highlighted that there is also a chance for the ICPS holders to be rewarded with potential capital appreciations from the offer price of RM1 should the ICPS ( which will be listed on Bursa) trade at conversion premium.
The research arm noted that conversion premium is the difference between the value of the ICPS and the value of the ordinary shares if the ICPS are converted.
It recapped that for a quick comparison, industry peer SP Setia Bhd’s variant of preference shares, namely RCPS-iA and RCPS-iB, are currently fetching huge conversion premiums of 208 per cent and 245 per cent, respectively, to the ordinary shares.
“Taking a view that the worst of Covid-19 is behind us with a gradual recovery likely from the second half of current year 2020 (2H20) onwards, the FY20 internal targets for property sales at RM1.4 billion (effective) and new construction contract wins of RM2 billion are kept intact.
“In addition, forward earnings visibility will be underpinned by unbilled property sales of RM2.6 billion and outstanding construction order-book of RM5.4 billion as of end-March 2020.”
Following its conference call with management, Kenanga Research adjusted its FY20E and FY21E net profit to RM421 million (up 33 per cent) and RM603 million (down 10 per cent), respectively.
This was mainly to factor in the timing of property billings including the lumpy recognition of property projects in China and Singapore upon physical completion in 2HFY20 and the payment of ICPS preferential dividends next year.