Oscar's Portfolio - 23/09/2014

SELL SUNWAY (5211) at 3.61 for 200 units.

Gain - 8.18%

Review from CIMB

Target RM3.85 (Stock Rating: ADD)

Sunway's proposal to relist its construction arm was a positive surprise. While the listing exercise would further unlock value, the main appeal is the potential special cash dividend distributable to existing Sunway shareholders. We estimate a base-case of 20-30 sen/share, which translates to an attractive yield of 6-9% excluding normal dividends. This will materialise in FY15 given the IPO timing of 2Q15. We estimate a 5-6% dilution to FY15-16 EPS arising from the almost halved stake in the list-co, but dilution to RNAV is largely offset by the proceeds raised. We raise our RNAV-based target price as we update for SunReit's market cap and land values (still based on a 20% discount). Maintain Add. The special cash dividend is the key catalyst.

What Happened 

Sunway Bhd has announced plans to re-list Sunway Construction. The deal structure comprises a dividend-in-specie of the listco's shares to Sunway shareholders and an offer-f0r-sale (OFS). Post IPO, Sunway Bhd's stake in the list-co Sunway Construction Group (SCG) will decline from 100% to a minimum of 51%. IPO details should be available in 1Q15 and listing is targeted for 2Q15. A "substantial portion" of the listing proceeds will be "rewarded" to Sunway's existing shareholders as special cash dividends, Sunway Bhd said. 

What We Think 

While the IPO plans for SCG was a surprise, we are overall positive about this move as it would enable Sunway to unlock the value of its construction arm. However, we expect the main appeal arising from the listing plans of SCG to be the potential cash dividends for Sunway Bhd's shareholders. Based on our sensitivity analysis, Sunway Bhd should be able to pay out a minimum of 20-30 sen/share in special dividends, on top of the normal dividends of 10 sen p.a. For the listco SCG, it will be profiled as a pure contractor with an outstanding order book of RM3.4bn, with growth driven mainly by domestic jobs. Construction constitutes 60% of SCG's net profit while precast concrete products make up the balance. 

What You Should Do 

Accumulate ahead of the IPO exercise. Our estimate of the potential DPS translates to a dividend yield of 6-9% for FY15, excluding normal DPS. This immediately puts Sunway ahead of other contractors under our coverage that currently offer between 3 and 6%. The dividend angle adds on to the likely strong job flows over the next few months. The group's aggressive target of at least RM1bn worth of contracts by year-end is still within reach.