Wednesday November 24, 2010

SunCity, Sunway to combine? Analysts see a current trend of M&As

By CECILIA KOK cecilia_kok@thestar.com.my
PETALING JAYA: Market observers are speculating that a marriage of sorts is on the cards for Sunway City Bhd (SunCity) and Sunway Holdings Bhd, after both companies had their shares suspended from trading for two days from yesterday, pending a material announcement on a corporate exercise. According to several analysts polled by StarBiz, the potential marriage between the sister companies would most likely be consummated via a share-swap, non-cash arrangement. The pricing for the potential deal, nevertheless, remained a question. SunCity's last traded price was RM4.49 per share, while that of Sunway was RM2.25. A merger between SunCity and Sunway was seen likely, as such an exercise would create synergies for the companies' property businesses. For instance, SunCity's would then be able to draw on Sunway's construction, building materials, and trading operations, resulting in meaningful cost savings for the group. The potential merger would also create a larger entity, with enhanced liquidity for the group's accelerated business growth. According to Maybank Investment Bank Bhd's property analyst, Wong Wei Sum, the potential merger would likely result in a combined market value of RM3.46bil for the enlarged group. On top of that, the exercise would also result in the enlarged group having a combined land bank totalling 2,642 acres and a gross development value of projects worth a total of RM25bil. Analysts were non-committal, though, on which of the two entities would emerge as the holding company from the potential deal, but they were pretty sure that no third-party would come into the picture. The potential merger between SunCity and Sunway seemed to coincide with the recent flurry of mergers and acquisitions (M&As), involving several major players in the local property and construction industry. According to analysts, a consolidation trend was seen emerging in the industry as players attempt to enlarge their market capitalisation to boost their capacity, while minimising

competition, to bid for larger projects be it in the local market (particularly those under the 10th Malaysia Plan) or overseas. For instance, IJM Land Bhd and Malaysian Resources Corp Bhd (MRCB) yesterday signed a memorandum of understanding to merge in an exercise seen by many as a move to leverage on each other's strengths, while boosting their chances of being appointed as the main developer of the prized Rubber Research Institute land in Sungai Buloh. With MRCB being majority-owned by the Employees Provident Fund, the chances of winning government-rolled out projects are high indeed. Other prized projects to bid for include the extension of the Klang Valley's light rail transit system, new buildings in Putrajaya as well as the cleaning up of the Klang river. Less than a month ago, UEM Land Holdings Bhd and Sunrise Bhd had already embarked on an M&A route, with the former proposing to take over the latter to boost its land bank and diversify its product offerings into high-rise residential and integrated commercial development. The proposed acquisition would also enable UEM Land to capitalise on Sunrise's strong brand and expertise to enhance its market position in the industry and enhance its appeal to high-end local and foreign buyers.

Saturday August 20, 2011

SunCity and Sunway to be delisted

PETALING JAYA: The shares of Sunway City Bhd (SunCity) and Sunway Holdings Bhd would be delisted from the Main Market of Bursa Malaysia on Aug 23, separate filings by CIMB Investment Bank Bhd and RHB Investment Bank Bhd to the stock exchange showed. The merger, which was announced last November, involved cash and share swap of RM4.5bil made by Sunway Sdn Bhd, a company controlled by Tan Sri Jeffrey Cheah. The new entity would be known as Sunway Bhd.

Friday November 26, 2010

Sunway-SunCity merger proposal gets thumbs up

By SHARIDAN M. ALI sharidan@thestar.com.my
Analysts say it is a positive synergistic move PETALING JAYA: The proposal to merge Sunway Holdings Bhd and Sunway City Bhd (SunCity) under a single entity via a takeover by Sunway Sdn Bhd (Newco) has received good response from analysts who view it as a positive synergistic move. Tycoon Tan Sri Jeffrey Cheah, who is behind Newco, also holds 47% and 44% in Sunway and SunCity respectively. Credit Suisse said investors generally felt the proposed merger was to eliminate inefficiency from duplication of property businesses. Both companies have their respective property divisions, which means two different property teams running independently, and in some cases, competing against each other for the same property pie, despite having a common shareholder and the same Sunway branding, it said in a report yesterday. Also, the research house said, the new larger entity would make it more investable.

The Sunway Group chairman Tan Sri Jeffrey Cheah(left) and Sunway Holdings Bhd managing director Yau Kok Seng (right) at a briefing on Wednesday to announce the merger. Starpic by Chan Tak Kong

As two separate entities, the market capitalisation of RM1.4bil for Sunway and RM2.1bil for SunCity made them not so investable and relatively illiquid despite having over 50% free float. This resulted in both stocks trading at a significant discount to their peers. We believe this was one of the key drivers for the merger, said Credit Suisse. The management of the companies was quoted as saying the rationale behind the merger was to have a new entity with a bigger scale and able to extract synergies through economies of scale and integration. On Wednesday, Sunway and SunCity received a takeover offer from Newco for RM4.5bil in cash-and-share swap. The exercise entails Newco offering RM2.60 per Sunway share, RM1.50 per Sunway warrant and RM5.10 per SunCity share and RM1.29 per SunCity warrant. Newco will issue an equivalent value of shares representing 80% of the offer prices and pay cash for the remainder 20%. The offer would also include Newco issuing new warrants for free to all shareholders of SunCity and Sunway on the basis of one Newco warrant for every five Newco shares. Based on SunCity and Sunway's last traded prices of RM4.49 and RM2.25 respectively before the announcement, the offer prices represented a premium of 13.6% and 15.5% respectively. The merged entity could be valued at RM4.5bil, making it the fourth largest property company in Malaysia.

But, Credit Suisse said, at this stage it was not known who would be leading the merged entity and whether key management personnel of the respective divisions would be retained. At this stage, we are not aware of Government Investment Corp's (GIC) stand on the proposed merger, given that the merger will dilute its current 100% exposure to property to 65% in Newco, it said. GIC of Singapore holds a 21% stake in SunCity. We also do not know if Newco will retain its other businesses or dispose of its non-property businesses, like the trading, quarry, construction, and building materials divisions, said the research house. Meanwhile, Hwang-DBS Vickers Research in a report said the offer price of RM2.60 per share was fair for Sunway. The offer price is at 4% discount to our sum-of-part derived from target price of RM2.70. This values Sunway at 13 times of its financial year 2011 earnings per share and 1.6 times book value versus the sector average of 18 times and 1.6 times respectively, it said. It added that Sunway would be able to leverage on the presence of GIC, SunCity's strategic shareholder and the larger market cap would help build a stronger institutional following. Cheah is expected to have more than 40% in Newco and GIC 12%. SUNCITY-WA : [Stock Watch]

Thursday July 26, 2012

Sunway roll-backs seen positive

SUNWAY BHD By Hong Leong Investment Bank Research Buy (maintain) Target price: RM2.93 SUNWAY'S share price has been relatively muted after it was revealed that the company (by May) had not launched any new property projects while guiding down its new launches from RM1.5bil to RM800mil (based on effective stake). The lower revised target was mainly due to the postponement of about RM300mil gross development value (GDV) based on 60% stake for Sunway Geo located at South Quay and RM180m GDV based on 60% stake in Tianjin, China. The former is due to the slower take-up rates for its existing projects i.e. LaCosta Condominium (GDV: RM242mil, 51% take-up), while the latter is due to tightening policies in China. Although investors may perceive this negatively, Sunway tends to launch its products at a premium of some 10% to 30% compared with its neighbouring developments, hence the takeup rate for new launches has been slower compared with the rest of its peers. Before the merger, its take-up rate had been approximately 60% to 70%, and only jumped up to 90% in the financial year ended June 30, 2011 (FY11) after the merger. We applaud the management's decision to roll back its new launches. Firstly, it will avoid having unnecessary working capital tied in.

Secondly, with a higher take-up rate target, it will translate to faster monetisation of its development projects. Hence, we believe that we are beginning to see the positive changes arising from the merger in the form of prudent risk-adjusted development ventures to ensure that shareholders' interests are protected. So far, Sunway's new major launch has been from Pasir Ris, Singapore, with a GDV of some RM266mil (based on 30% stake). The balance of launches will be sporadic around Penang, Ipoh, Equine Park, etc, places where the management is confident about take-up rates. Despite the lower target of new launches, it does not indicate that Sunway's new property sales will be badly affected. As of the second half of 2012, the company has already achieved new property sales of about RM600mil, a sharp increase of RM426mil in new sales achieved for the second quarter compared with only RM174mil new sales in the first quarter. By simply annualising the new sales figure, which works out to new sales of some RM1.2bil, we believe Sunway will exceed their new sales target of RM800mil and touch close to the previous new sales target of RM1.4bil. We estimate that Sunway has an unbilled property sales of about RM2.1bil, translating to 2.3 times FY11's property revenue. By assuming just the book value of the property and property investment division, our base case valuation for Sunway works out to RM2.48. Including dividend yield of 2.3%, there is still 10.6% upside from the current price level, hence we believe that the company remains undervalued. Earnings for FY12 and FY13 have been cut by 3.5% and 12% respectively to reflect slower property earnings contribution while introducing our forecast for FY14. NEXTNATION COMMUNICATION BHD By TA Research Sell (downgrade) Target price: 10 sen WHEN we initiated coverage, Nextnation Communication Bhd's (NNCB) core business comprised of web platform hosting and mobile messaging gateway services. The group, however, has since shifted away from the mobile telecommunications space to platform infrastructure services.

We are positive on this move as it signifies that the company is competitive enough to realign its business model in line with the current trend of smartphones replacing conventional handsets. NNCB is progressively diversifying its core business away from its legacy module products, namely mobile messaging gateway and mobile content development tools, which carry razorthin margin due to stiff competition. Moving forward, NNCB will now focus primarily on mCommerce-Suit module and platform infrastructure hosting services for telecommunications companies, which have better growth prospects. The PT Inovisi Infracom TBK contract is expected to generate gross margin of 30% for NNCB against gross margin of 20% achieved in the financial year ended April 31, 2012 (FY12). NNCB will commence this project by September and profits from the contract will be backloaded in-line with the progressive implementation of the project, which is currently in its six-month trial period. NNCB expressed confidence that it stands to derive more sales from the growing Indonesian market by tapping on Inovisi's existing clientele base. To recap, NNCB was awarded an outsourcing contract from Inovisi, which is a conglomerate based in Indonesia and listed on the Indonesian Stock Exchange with market capitalisation of US$1.7bil. Inovisi's businesses cover telecommunications, energy & resources, oil & gas, shipping & logistics, toll road concessions, media and e-commerce and others. For its telecommunications segment, Inovisi provides telco software and platforms, broadband and network applications, and enterprise productivity and mobility solutions and others. NNCB will receive a minimum revenue guarantee of US$22.5mil (RM69.75mil) over an initial period of three years, with an option to extend another three years. Services outsourced to NNCB comprise of InoConnect IP Interconnection, a service platform serving telco operators to deliver IP services and InoConnect Bandwidth Optimizer, a system that reduces large data packets into smaller packets, thus allowing data to be sent out faster over IP networks. Inovisi is estimated to deliver platform infrastructure hosting services worth up to RM300mil for its customers comprising local telecommunication companies such as Telkomsel, Indosat, Excelcomindo and Axis over the next three years. Currently, Inovisi merely outsources a portion of its services to NNCB, and hence, there is potential of Inovisi progressively upsizing NNCB's contract value. Furthermore, Inovisi's management expressed that its current focus is to grow its new ventures in coal mining and oil & gas.

Therefore, Inovisi is increasingly seeking to outsource the bulk of its telco service offerings to third party service providers. As a sign of confidence in NNCB's capability, Inovisi subscribed for a 10% stake in NNCB via a private placement exercise in February 2012. We revised FY13 and FY14 earnings forecasts downwards by 36% and 14% after trimming FY13 and FY14 gross margin to 20% and 30% from 32% previously. We have conservatively assumed lower margin in FY13 as the benefits from the Inovisi contract will be partially offset by start-up costs. We only assume the group will only able to capture the higher margin from Inovisi contract from FY14 onwards. We revise target price-earnings ratio (PER) to 13 times (12 times previously) to reflect the recent share price rally of its global peers. Its closest peers such as US-based web-hosting companies, Rackspace Hosting Inc and Equinix Inc, are trading at 39.3 times and 43.3 times PER respectively. We like the company for its strong earnings growth outlook. However, the share price has rallied a whopping 110% in the past one year. Hence, one could conclude that the earnings accretion from the Inovisi contract has been largely priced in into the share price. Therefore, we downgrade NNCB to a sell from buy previously with a target price of 10 sen based on 13 times fully-diluted calendar year 2013 earnings per share. Further re-rating catalysts would emanate from the group securing more contracts from Inovisi and better-than-expected margin accretion from the shift in business model. OLDTOWN BHD By OSK Research Buy (maintain) Fair value: RM2.00 WE expect Oldtown's second-quarter results to exceed our previous estimates, coming in at RM11mil to RM12mil. These numbers are likely to be driven by stronger sales for its fast moving consumer goods (FMCG) products in China, surging 58% in first half compared with first half 2011, as well as better-than-expected food and beverages (F&B) sales due to promotions such as its newly-introduced set lunch menu. Moving towards the end of financial year ending Dec 31, 2012 (FY12), management is guiding for an internal FY12 net profit target of some RM40mil but we believe it could surpass this target by some 5%. We are taking the opportunity to raise our FY12 and FY13 core earnings forecasts by 6.3% and 13.4% respectively, mainly based on our expectation of a higher utilisation rate at its

upcoming FMCG plant in FY13, higher average selling prices for its FMCG products, and higher average spending per customer. We believe that its appointed distributors will substantially stock up on Oldtown coffee products next year once its new factory in Ipoh starts to cater to increasing demand, which will in turn contribute to a sharp spike in sales in first half of FY13. Despite our positive view, our earnings revision for FY12 is minimal as we think that the company's third quarter earnings may be subdued since the period coincides with the Ramadan month, during which its F&B business experiences a seasonal slowdown versus other quarters. Also, we do not see a significant rise in contributions from its FMCG segment as the company's existing plant is running close to full capacity (95%-96%). That said, we gather that management will beef up advertising and promotions during the quarter to boost sales. It recently introduced the Rendang Delight Menu, which we gather was well received. All in all, we continue to like Oldtown's exciting growth prospects, supported by potentially major developments next year. We are reiterating our buy recommendation on the stock, with a revised fair value of RM2.00, as we roll over our valuation to 13 times FY13 earnings per share. Our fair value implies a potential return of 19.4% (including prospective dividend yield). AXIS REIT By Hwang DBS Vickers Research Buy (maintained) Target price: RM3.35 AXIS Real Estate Investment Trust's (REIT) acquisition line-up remains strong with agreements for three properties signed (offering 8% to 9% net property income yields), while two more are likely to be firmed up by end-2012. A majority of the properties under negotiation are tenanted to companies within Axis' current customer base, while Axis Technology Centre 2 (ATC2 an office/warehouse block) is a private equity project by the promoter that is likely to be injected. Gearing will potentially hit 35% by end-2012, and we think a placement is foreseeable in early 2013. The REIT will be seeking approvals for renewal of its Income Distribution Reinvestment Plan (up to 2.2 sen of the second quarter of 2012 distributions), additional equity placements (up to 91 million units), management fees payable in units (up to 2 million units) and acquisitions and disposal of properties. Asset enhancement initiatives for Infinite Centre and Wisma Bintang are on track, and should see strong gains in valuations and rentals when completed (estimated by 2013), which is factored into our forecast.

The REIT is also applying for MSC Malaysia status for various properties, which could result in rental premiums if received due to strong demand from companies. After modifying our assumptions to account for Kayangan Depot disposal, acquisition of Wisma Academy & Annex and potential acquisitions in the financial year ending Dec 31, 2013 (FY13) (we now assume ATC2 will be acquired in the second half of 2013 instead of in the second half of 2012 at 8% net property income yield), FY12 to FY14 forecast earnings are adjusted by -0.3% to 1.3%. Long-term growth drivers are intact with strong contribution from ATC2, leading us to lift our target price to RM3.35 (but beta adjusted to 0.6 from 0.5). FY12 forecast distribution per unit is raised to 19.4 sen after including management fees payable in units (estimated to be 15% of management fees) and disposal gain on Kayangan Depot. NEXTNAT : [Stock Watch] [News]