Sunway Holdings

Sunway Holdings: ♦ 52.3m new shares @ RM1.455. Sunway will place out up to RM52.3m new shares at RM1.455/share pursuant to the proposed private placement announced end-Jun 09. Net proceeds of RM74.3m from the exercise will reduce Sunway’s net debt and gearing of RM669.1m and 1.05x as at 31 Mar 09 to RM594.8m and 0.83x.

♦ No issue. To recap, we are neutral on the exercise. While the exercise is EPS dilutive, it will strengthen Sunway’s balance sheet, beefing up its war chest. It was reported that Sunway is in the running for the assets of HeidelbergCement in Malaysia worth US$200-250m (RM700-875m) comprising aggregates quarries, ready-mixed concrete/asphalt plants, via a joint bid submitted with a private equity fund.

♦ Forecasts. FY12/10-11 net profit forecasts are raised by 3-4% on interest savings from share placement proceeds while our EPS estimates are trimmed by 5-6% on dilution from a 10% increase in share base. Fully-diluted (for outstanding warrants) FY12/10 EPS is reduced by 3% from 16.8sen to 16.4sen.

♦ Risks. The risks include: (1) New contracts secured in FY12/09 coming in below our target of RM2.2bn (YTD = RM1.5bn); and (2) Rising input costs.

♦ More upbeat on the sector, but valuations aren’t cheap. While we envisage an eventual recovery of the construction sector over the medium term, the recovery is expected to be slow and uneven, consistent with our view on the recovery in the global economy. Meanwhile, irrational exuberance has propelled valuations of key construction stocks almost to the levels last seen in 2007-2008, when one of the biggest stock bubbles of all times occurred. We believe high valuations for construction stocks are no longer tenable on the back of: (1) Malaysia’s ballooning budget deficit; and (2) The quite evolution of Malaysia’s political system to a two-party model that means “direct-negotiated” fat-margin public jobs will become increasingly rare with more checks and balances in the system.

♦ Valuations and recommendation. Sunway is an exception due to the still undemanding valuations. Due to the new shares to be issued, indicative fair value is trimmed by 3% from RM1.68 to RM1.64 based on 10x revised fullydiluted FY12/10 EPS, in line with our benchmark 1-year forward target PER for the construction sector of 10-12x. Maintain Outperform.

52wk Price Range (RM) 0.535-1.56

Major Shareholders: (%)
Tan Sri Jeffrey Cheah 43.3

By RHBinvest
Analyst: Joshua CY Ng