Sunway City - Leasing hotel from Sunway REIT (HLIB)

HOLD

INDUSTRY: OVERWEIGHT

Price Target: RM 5.10

Share price: RM 5.30

News:

 Sunway Putra Hotel Sdn Bhd, a wholly-owned subsidiary of Suncity, has entered into an agreement to lease a hotel located at 100 Jalan Putra, Kuala Lumpur from Sunway REIT for a period of 10 years (commencement date to be fixed later).

 The hotel consists of 458 hotel rooms, 170 serviced apartments and 3 penthouses. The precise terms of the lease were not disclosed, but the basis of rental charges will be 20% of revenue, plus 70% of gross operating profit of the Hotel, and minus master lease expenses.

 The terms are similar to the other hotels owned by Sunway REIT that are also leased out to Sunway City (Sunway Resort Hotel and Pyramid Tower Hotel).

Financial impact:

 None for FY11 according to management.

 Given that Suncity's hotel division already operates 6 hotels with a total of more than 1,700 rooms, and that the hotel divisions contributes less than 10% of operating profit, impact is likely to be minimal.

Pros / Cons:

 None

Risks:

 Slow sales for certain projects, such as Vivaldi.

 Abortion of the merger with Sunway Holdings (highly unlikely).

Forecasts:

 We maintain our earnings forecast of 12-20% growth for FY11-13, driven by RM1.2bn of unbilled sales, RM2.1bn of launches from eight major projects in Malaysia, and RM370m of launches in India, China and Australia this year.

Rating:

 Share price now trades at 4% premium to the RM5.10 offer price; maintain HOLD call.

Valuation:

 Price target of RM5.10 is based on general offer price from Sunway Sdn Bhd, which is 29% below our RNAV estimate of RM7.15 per share.

 Merger offers investors exposure to enlarged entity with higher liquidity, reduced conflict of interest (as Sunway Holdings also has property projects), better corporate governance (GSIC will be a major shareholder of the enlarged entity), and most importantly, potential of unlocking hidden values postmerger.