Jeffrey Cheah, Pusing-boy Masterstroke!!!

Malaysian Insider: Sunway is expected to have potential market capitalisation of over RM3.5 billion, revenue of over RM3.3 billion and assets of over RM8 billion said Cheah. This comes as UEM Land and Sunrise have proposed to merge and IJM Land and MRCB have signed an MOU to explore a merge. The Sunway founder said that the merger was due to right market conditions and the need for size rather than as a response to the latest industry developments.

“I am not fearful of being taken over,” he said. “The size of the new company makes a difference rather than 2 separate entities. Size brings us opportunities. We will have access to larger markets and the ability to bid for projects with higher value, particularly in international markets," said Cheah.

He added that the larger merged entity should boost the company’s profile.

“We aspire and now with this merger, we are well-positioned to become a truly Asian brand, through one name and one identity,” he said.

Cheah and his daughter, Sarena Cheah Yean Tih, are the owners of Sunway and will have a stake of about 44 per cent stake in the company after the merger. They currently have direct and indirect stakes of approximately 43.68 per cent of SunCity and 46.53 per cent of Sunway Holdings. The Government of Singapore Investment Corporation will emerge as the second largest shareholder in Sunway with a 12 per cent stake.

The merger is pending shareholder approval and the acquisition will be satisfied by cash and shares and warrants in Sunway. Following the acquisition, Sunway Holdings and SunCity will undertake a capital repayment exercise to distribute proceedings to shareholders.

Sunway Holdings meanwhile reported a RM48.5 million net profit in the third quarter ended September 30 on the back of RM411.5 million in revenue.

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So how will the proposals be greeted? The structure and terms seem a bit convoluted, that can be understood only by the bloody lawyers and bankers who were part of the advisory team. I read and re-read it a few times, I will try to explain what "I think" they meant, but I could be wrong.

Offer Valuation for existing shares
a) Sunway Holdings 2.60
b) Sunway Holdings warrants 1.50
c) Sunway City 5.10
d) Sunway City warrants 1.29

The value will be exchanged at 2.80 new shares in the Newco, plus they will get 20% of it in cash, plus a 1 free newco warrant for 5 newco shares.

If I understand correctly, lets take the example someone owning 10,000 of each securities:

a) 10,000 Sunway Holding shares x 2.60 = RM26,000. 80% of it will be converted into Newco shares = 80% x 26,000 / 2.80 = 7,428 Newco shares. 7,428/5 = 1,485 Newco warrants. Cash 0.52 x 10,000 = RM5,200. Hence the owner will now get the highlighted components.

b) 10,000 Sunway Holding warrants x 1.50 = RM15,000. 80% into Newco = 80% x 15,000 / 2.80 = 4,285 Newco shares. 4,285/5 = 857 Newco warrants. 0.30 x 10,000 = RM3,000. Hence the owner will now get the highlighted components.

If I am correct, this is a highly attractive deal and a swift one as well as the last date for submission is 23 December 2010. It is attractive because:
- it values Sunway City relatively cheap at just below 1.0x Book Value (not even RNAV) when the big boys get at least 2.0x
- it values Sunway Holdings relatively cheaply considering the 20%-30% year on year EPS growth for the next 3 years
- the cash component basically is a generous capital/dividend repayment which would ensure a great acceptance rate
- the capital repayment extends to everyone, including warrant holders
- the free warrants is a good kicker
- its a swift deal, which will see the Newco being traded within 2 months

The merged entity will kick off trading at 2.80, do you think it will go up or down from there? Together, at 2.80, it will trade at around just 7x current year's earnings.Where the prices will go will depend on where investors think the newco will trade at when requoted.I think 3.20-3.50 is fair. So if you think likewise, where will you be buying the shares and warrants up to??? I provide the platform and ideas, you do the math.

In a brilliant masterstroke, Jeffrey and his advisors have basically revalued his two flagship companies closer to a genuine valuation. The often said drawback of his shares as lacking in liquidity can be almost eradicated now.

Both Sunway City and Sunway Holdings suffer from gross undervaluation. Please re-read my posting on both a couple of days ago. Hence the present offers still present very decent upside for the merged entity.

I think from the 3 property deals so far, UEM Land-Sunrise, IJM Land-MRCB and Sunway City-Sunway Holdings... If I can present in simple math: UEMLand-Sunrise is 1+1=3; IJM Land-MRCB is 1+1=2.5; Sunway Holdings-Sunway City is 1+1= 3.5 ... Jeffrey's deal is far superior. It now only unlocked value, it gives back a healthy bonus cash dividend which does not stretch the balance sheet, it prompts the market to give the companies a better valuation and sustains it. No one is left out, no minority should complain at all.

Sunway Holdings Press Release

:

Reference is made to the announcement by SunH dated 23 November 2010. On behalf of the Board of Directors of SunH (“Board”), CIMB Investment Bank Berhad and RHB Investment Bank Berhad wish to announce that the Board has today, received a letter from Sunway Sdn Bhd (formerly known as Alpha Sunrise Sdn Bhd) (“Newco”), which sets out Newco’s offer to acquire all of the business and undertaking of SunH as carried on by SunH as at the date hereof, including all Assets and Liabilities of SunH as at Completion (“SunH Business”) at an aggregate purchase consideration (“Offer Price”): (i) equivalent to RM2.60 per ordinary share of RM1.00 each in SunH (“SunH Share”) multiplied by the total outstanding SunH Shares (less treasury shares, if any) at a date to be determined later; (ii) equivalent to the Black-Scholes valuation based on RM2.60 per SunH Share and calculated by applying all the relevant variables as at 22 November 2010, for the options issued under SunH’s employees’ share option scheme (“ESOS options”), multiplied by the total outstanding number of ESOS options issued (for every issue of the ESOS options, batched by their respective conversion prices). The Black-Scholes values for the ESOS options range from RM0.98 to RM1.67 per ESOS option (subject to the respective conversion price of the options); and (iii) equivalent to the Black-Scholes valuation based on RM2.60 per SunH Share and calculated by applying all the relevant variables as at 22 November 2010, being RM1.50 per warrant of SunH (“Warrant”), multiplied by the total outstanding number of Warrants in issue at a date to be determined later. Further details of the Offer are set out in the said letter and a copy of the said letter is attached herewith. The Offer is a related party transaction pursuant to Chapter 10 of the Listing Requirements of Bursa Malaysia Securities Berhad. Therefore, the Offer will only be deliberated by the non-interested directors of SunH. The interested directors of SunH will abstain and will continue to abstain from deliberations and voting at the relevant Board meetings of SunH in respect of the Offer. An independent adviser will also be appointed to advise the non-interested directors and non-interested shareholders of SunH. The Board will deliberate on the said letter and decide on the next course of action. Accordingly, a further announcement will be made in due course. This announcement is dated 24 November 2010.

SUNWAY HOLDINGS BERHAD (FINANCIAL RESULTS ANNOUNCEMENT)

MEDIA RELEASE 24 NOVEMBER 2010

Sunway Holdings’ net profit up 2.7 times

Sunway Holdings Berhad maintained its course to achieve a record profit year, recording RM48.5 million net profit in the 3^rd quarter of 2010 and a cumulative 9-month net profit of RM 137.0 million.

The Group achieved higher revenue of RM489.0 million as compared to the revenue of RM411.5 million in the previous corresponding quarter ended September 2009.

The net profit reported for the current quarter was 2.7 times higher than the net profit recorded in the previous corresponding quarter ended September 2009, with a 2.6 times increase in basic earnings per share to 8.40 cents for the current quarter ended September 30, 2010, compared to 3.30 cents in the previous corresponding quarter. The cumulative basic earnings per share for the current 9-month period is 23.75 cents.

The construction division continued to be the main contributing segment to the quarter’s earnings with stronger margins recorded by its Singapore precast division, followed by the trading and property development divisions.

The Group expects its construction division to record impressive profits backed by its healthy construction outstanding order book which currently stands at RM2.3 billion.

“During the year, the Group secured new construction orders of approximately RM700 million to date. The government’s commitment as stated in the recent announcement of the Budget 2011 and Economic Transformation Programme (ETP) complemented with the pick-up of private projects will be the key catalyst to the construction industry,” said Mr Yau Kok Seng, Managing Director.

“Our trading arm has leveraged on its increasing regional presence as well as diversified earnings stream to continuously provide the Group with sustainable earnings. This division will continue to be one of the Group’s biggest revenue contributors,” Yau added.

The Group’s trading division has expanded its geographical footprint with presence in 7 different countries, namely Malaysia, Singapore, China, Thailand, Indonesia, India and Australia.

Yau continued, “The Group’s property unbilled sales stands at about RM400 million from existing property development projects, both locally and abroad. Coupled with up-coming launches as well as continuous exploration for new land banks, we expect the property development division to continue to contribute positively to the Group’s earnings.”

The Group made its first foray into the Sri Lanka property market with the signing of a Joint-Venture Agreement with the Dasa Group of Sri Lanka for a RM250 million mixed development project in Colombo. This quarter also saw the launch of the Group’s 3^rd property development project in Singapore, being its first private development project, called the Vacanza@East, which has seen impressive take-up rates since its launch.

With main contributions channeled in by construction, property development and trading divisions, the Group expects to record sustainable earnings in the current year, with more than 80% of its profit contribution expected from outside Malaysia.

For more information, please contact:-

Ng Lai Ping

Chief Financial Officer

Sunway Holdings Berhad

Tel: 03-5639 8998

Fax: 03-5639 9866

Email: nglp@sunway.com.my

Sunway City Or Sunway Holdings? Its A Wabak!

Sigh, wrote the following last night ... was going to post, then found out both were suspended .... sigh...

Following the rerating in UEM Land and Sunrise, we had the MRCB and IJM Land being suspended now pending a material disclosure. Is this rotational play? Rather not I think. Its a pivotal point for the entire market. There is a deep underlying need to rerate many of the property related counters. Its like a wabak, they are like an epidemic, its a tectonic shift one might say. You and your neighbours may be sitting a huge coal deposit for the longest time.

Sunway City and Sunway Holdings have been active for the past few days. Are they headed somewhere higher? Or is this rotational play, which will mean it petering very soon, or forming a false high point very quickly and then fizzling out. My views at the end.

The run up in Sunway City can be attributed partly to the big 28 page CIMB report:

CIMB Research: Suncity is 44% owned by Tan Sri Jeffrey Cheah, 21% owned by Government of Singapore Investment Corp (GSIC) and is a sister company of Sunway Holdings (SGW MK, Not Rated). Suncity can be considered a unique property company as its earnings are well-balanced between development and investment. After the listing of Sunway REIT (SREIT MK, Not Rated) which is now 37% owned, property development is targeted to contribute around 60% of core profits. The group has landbank in excess of 1,400 acres spread throughout the Klang Valley, Perak and Penang. It also has 300 acres of overseas landbank in China, India and Australia. Property investment is targeted to contribute 40% of group profits, coming from numerous hotels, shopping malls, education buildings and theme parks.

The group’s landbank is mostly in prime locations in the Klang Valley, the most important ones in terms of gross development value (GDV) being the RM5.2bn Sunway South Quay in Bandar Sunway, the RM3.6bn Sunway VeloCity in Kuala Lumpur and the RM2.7bn Sunway Damansara in Kota Damansara. The Klang Valley houses 34% of the group’s landbank while the largest single piece of land is the project in Ipoh which makes up 43% of the total landbank. Overseas
projects in Australia, India and China comprise 15% of the landbank but a larger 26% of GDV. The most significant is the RM5bn project in Tianjin, China and the RM950m Hyderabad project in India.

Of the total GDV of RM21bn, 59% is from the Klang Valley, 6% from Penang and 2% from Perak. A significant 33% is from overseas, with China making up 25% of group GDV, India 5% and Australia the remaining 3%.

SunCity is one of the very few Malaysian property companies that have significant property investment assets. The only other major property developer with substantial investment properties is IGB Corp (IGB MK, Not Rated). SunCity’s assets are located mostly in Bandar Sunway but the group also has a shopping mall on mainland Penang, a hotel in Cambodia and a hotel in Vietnam. All in, it has six hotels (two in the Klang Valley, two in Penang and one each in Cambodia and Vietnam), three shopping malls (two in the Klang Valley and one in Penang), two themes parks (one in the Klang Valley and one in Ipoh), one medical centre (in the Klang Valley) and two college buildings (both in the Klang Valley).

Management dynamics - SunCity ranks third after SP Setia and Mah Sing in terms of property development dynamics. In the raw material inputs category, SunCity scores highly in all areas as it has a strong track record of acquiring strategically located land bank and providing good accessibility. It scores moderately in the business operations category because its track record for sales is patchy and often swings with the business cycle, unlike SP Setia or Mah Sing which have managed to push out sales in good times and bad. SunCity also scores moderately in the marketing proficiency category as its strong brand name and product differentiation are offset by occasional delays in reacting to market conditions. In terms of financial planning, SunCity scores reasonably high as the strengthening of its balance sheet after the listing of Sunway REIT puts it in an enviable position to take advantage of expansion opportunities.

Industry SWOT analysis - SunCity also scores relatively well in terms of relative industry SWOT analysis. Its beefed-up balance sheet, strong ability to acquire strategically located land throughout the Klang Valley and professionalism stand out. On the flip side, its track record in terms of earnings and property development sales is more erratic, which can be a significant negative in terms of earnings predictability. The group also scores well in terms of its ability to take advantage of opportunities. This will be even more the case going forward given that it now owns the largest REIT in the country which is hungry for acquisitions. SunCity should not disappoint on that front as it is undertaking the development of numerous office and retail buildings in the Klang Valley alone. The threats to the group remain the economic and property cycles, which could cause earnings to swing. Should the group manage to execute successfully its overseas projects, the domestic volatility could be reduced.

FD RNAV of RM5.86 and 23% discount to NTA of RM5.21. We initiate coverage on SunCity with an OUTPERFORM call and RM5.27 target price based on 10% discount to RNAV. Potential re-rating catalysts include 1) robust sales due to continued strong demand for properties, 2) the successful launch of new projects in China and India, and 3) steady pipeline of investment properties to inject into Sunway REIT.

470m shares




OSK Research: With the cash freed up from its REIT, we believe that SunCity (NR) can now undertake more developments. The company has been awarded RM968m worth of contracts from its sister company, SunCity, over the past 5 years. We understand that SunCity has another RM1bn-1.5bn worth of jobs to be tendered out within the next year. These include: (i) Sunway office tower, (ii) Monash Uni extension, (iii) Sunway Medical Centre extension, and (iv) an office tower in KL.

The 65:35 Sunway-Dasa Group JV will be embarking on a mixed development in Colombo, Sri Lanka comprising 70 commercial and 180 residential units with a GDV of USD250m. Management expects the launch to take place in 2Q2011 and is guiding for PBT margins at a lucrative 20%. The group will enjoy a 5-year tax holiday once the project is completed in 2014. We are positive on its maiden Sri Lankan venture as the country’s recent political stability has spurred property prices.

P/BV 1.7
604m shares




My Views: These two stocks have been quite popular for the last few months. Many fundamental players have been buying in dribs and drabs but both shares did not move very significantly because the big fishes have not been keen on Malaysian equities in general. Sometimes we can get the 10%-20% gain even when the big fishes stay out. One must not be too angry about it, even though you may have been a tad early in discovering them, you may not get the big returns.

Hence when the platform shifts and the liquidity shift occurs, we need to reassess these stocks in the new light. Both are great trading buys.

Sunway Holdings' key is that its EPS growth in 2010 and 2011 will be a staggering 24% and 27% respectively, and supposed to breach 30% growth for 2012. How to go wrong here??? They get a large chunk of work from Sunway City anyway. Even RM3.00 is deemed as cheap to me for Sunway Holdings.

As for Sunway City, this is going to rock our socks off. The average P/BV for top players in the market for property stocks is around 2.0x. They are at 0.8x??????????????? Why .... Let's not look at why first. Sunway City has as good a landbank as any top local players. Yes, you may want to put in some discount because they have some overseas projects, even then should these overseas projects be even subjected to a discount in the first place??? They have a good stake in Sunway REIT which will provide good recurring income and will also act as an outlet for them to realise deep value in investments. So, is it that Sunway City is a second rate property player, of course not!!!

Yes, its not overly big ... yet. Its branding is good to superior. The brand is extracting value by expansion overseas. No matter how you cut it, its should not be below 1.0x.

Let's use NTA of RM5.21 and not the RNAV. I would not be surprised if it goes to 2.0x P/BV = RM10.42. Seems Repcoish doesn't it? Let's not be overly optimistic. I will wait for the reasons why they are not at 2.0x, you can supply the reasons as well: it could be that EPF or PNB or LTH etc. are not a sizable owner .... hhmmmm, why??? ... it could be that foreign funds are not in the local equity market for the longest time. We know the second part has improved markedly of late, I will be conservative a bit la and put a P/BV of 1.5x for a 6 month target = RM7.81.

These are just my blogging thoughts, don't use this without doing your own research.


NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.