Still some shine in Sunway City

ECM Libra Research has reaffirmed its buy call on Sunway City Bhd albeit with a lower target price of RM2.96 (RM3.60 previously) on expectation that the property sector would be finding a floor soon from which steady recovery can be built upon.

Like most property developers, Sunway City has seen demand for its properties take a tumble amid fast deteriorating economic conditions.

However, ECM expected work progress to pick up in the months ahead following the decline in building materials prices. Sunway City’s property development earnings in the near term will be underpinned by strong unbilled sales of RM869 million which is more than 1.2 times property development revenue in FY08.

The research house added that recurring income from its property investment division was also looking strong having more than doubled since the completion of the expansion of Sunway Pyramid and opening of Sunway Carnival in late 2007.

“We expect 49% of its Ebitda (earnings before interest, tax, depreciation and amortisation) in FY09 to come from property investment. Its jewel in the crown is Sunway Pyramid shopping mall which is contributing over 70% of Ebitda from property investment,” it noted.

ECM also said that it was only a matter of time before Sunway City becomes the largest Malaysian real estate investment trust (M-REIT).

“While the company’s plan to list its vast investment properties into a REIT last year was derailed by the global economic downturn, we remain optimistic that this will happen once confidence returns to the capital market.

“Based on our estimate by using a cap rate of 7%, the size of its REIT could be around RM3.1 billion which will put Sunway City as sponsor of the largest REIT in Malaysia,” it said, noting when that happens, intrinsic values of its properties would be unlocked, adding 45 sen per share.

Considering its resilient property investment earnings and potential value enhancement upon listing of its REIT, ECM said Sunway City was significantly undervalued, trading at a valuation of only 0.5 times its book value — equivalent to the valuation last seen during the minor property downturn in 2001.

“Furthermore, Sunway City is a good high beta play on recovery of the property sector. Despite its resilient earnings from property investment, its beta of 1.37 is the highest among property investment vehicles such as KLCC Property, IGB, KrisAssets as well as REITs,” said the research house.

Despite having gained 37.2% over the last one month, ECM believed Sunway City still has further upside potential due to improving investor sentiment of late.

“Further upside will be supported by our revised net asset value (RNAV) estimate of RM5.48 as well as positive earnings growth delivery and announcement of REIT listing,” it added.

Sunway City climbed 13 sen to close at RM2.19 yesterday.

By The EDGE Malaysia