Sunrise | Oversold to distressed level

November 25, 2008 at 1:46 am Leave a comment

• Proxy to high-end properties.
Sunrise is the undisputed proxy to Malaysian high-end properties due to its distinguished track record in developing the Mont Kiara enclave which is home to some of the finest luxury condominiums in the suburbs of Kuala Lumpur. Besides owning the largest landbank in Mont Kiara at 82 acres, Sunrise has also ventured outside Mont Kiara. It owns 2 parcels prime commercial land totalling 3.4 acres in the Golden Triangle as well
as 4.8 acres of mixed development land in Richmond, British Columbia, Canada. These prime landbank with remaining gross development value of RM9.7bn will underpin earnings visibility over the next 10 years.
• Fundamentals intact despite stormy weather.
Despite margin erosion from rising building materials prices and supply shock from large future supply of condominiums in Mont Kiara / Sri Hartamas area, fundamentals of Sunrise remain firmly intact. We believe
further downside risk to margin is limited as prices of commodities such as crude oil, steel and copper have eased. A softening property market is also a blessing in disguise which may result in fewer launches and thus, allow the market some time to absorb the large supply coming on stream in Mont Kiara. Its large unbilled sales of RM1.3bn will provide the perfect cushion against slowdown in the property sector. This does not include further conversion of bookings in its MK 11 project (we estimate at least another RM230m) as well as en bloc sale of MK 20 for RM767m under a call and put option arrangement.
• Valuation at distressed level.
Sunrise has been oversold…period. It is currently trading at 3.8x P/E based on FY2009 earnings as well as 0.7x P/BV. This is close to the distressed valuation of 1.4x P/E and 0.2x P/BV last seen during the Asian
financial crisis. Although these may indicate further downside risk, we believe the current property market down cycle is not as bad as last seen during the Asian financial crisis as fundamentals are stronger now.
• Initiate coverage with a BUY call.
We peg a target price of RM2.32 based on 30% discount to RNAV of RM3.32 to account for (1) uncertain earnings visibility beyond 12 months, and (2) poor market sentiments which may cap share price performance in the near term. At our target price, the implied P/E at 6.6x is similar to the level seen during the previous “mini down cycles” in 2001 and 2005.

PROXY TO HIGH-END PROPERTIES
Sunrise is probably the undisputed proxy to Malaysian high-end properties due to its distinguished track record in developing the highly popular Mont Kiara enclave which is home to some of the finest luxury condominiums in the suburbs of Kuala Lumpur.

King of Mont Kiara
As the pioneer developer, it has to-date completed 11 condominiums and 2 commercial projects in Mont Kiara since 1991. It has continuously been raising the quality standard of its products and has become the benchmark many developers aspire to match. More than just building expensive homes, Sunrise has created a living environment that appeals to not just the well-heeled Malaysian property owners/investors but also the expatriate community. The presence of 3 international schools, its strategic location between Kuala Lumpur and Petaling Jaya, and proximity to retail centres and other amenities have attracted more than
50 nationalities to call Mont Kiara their home away from home.

Darling of property investors
These expatriates as well as Malaysians alike have created a large tenant pool for Mont Kiara properties. It is estimated that almost 60% of occupants in Mont Kiara are tenants while the rest are owner-occupiers. Because of this, Mont Kiara properties, and in particular those built by Sunrise, are deemed investment grade and have been the darling of many property investors. Investors who bought Sunrise properties at developer’s price have typically been able to reap double digit gross rental yield as well as capital appreciation from 50% to 100%.

Astute leadership
Sunrise is managed by a capable team of professionals which is led by executive chairman Tong Kooi Ong and its executive deputy chairman Dato’ Allan Lim Kim Huat who have equity stakes of 18.3% and 5.4% respectively. Since Tong took control in FY2004, Sunrise has moved up a notch or two. Over the last 5 financial years (FY2004 – FY2008), core net profit has grown by more than 300%.

Venturing out of Mont Kiara
With 82 acres, Sunrise has the largest undeveloped landbank in Mont Kiara which will last at least 10 years. However, it is not resting on its laurel as it has been increasing its landbank in Mont Kiara over the years. Average book cost of its remaining Mont Kiara landbank is RM113 psf.
Recently, Sunrise has also ventured outside Mont Kiara with the acquisition of 3 parcels of prime landbank in Canada and Kuala Lumpur city centre. In June 2006, Sunrise acquired 1.8 acres of leasehold land on the fringe of the Golden Triangle in Kuala Lumpur which is behind the Renaissance Hotel along Jalan Ampang. This site has been earmarked for an office project known as “Solaris 3” with gross development value (GDV) of RM560m. With an estimate net lettable area (NLA) of 700,000 sq ft, the indicative selling price is RM800 psf. Also in June 2006, Sunrise made an opportunistic deal by acquiring 4.8 acres of freehold land in Richmond, British Columbia, Canada. This site, which has 3 automobile buildings erected thereon, has since been approved for re-development. 5 blocks of condominium together with some commercial elements will be developed in 2 phases. GDV is estimated at C$350m (RM1,036bn).
In May 2008, Sunrise raised eyebrows when it acquired Wisma Angkasaraya for RM179m. Wisma Angkasaraya, which is situated opposite the Petronas Twin Towers, is a 20 year old office building with NLA of 167,728 sq ft and land area of 1.6 acres. This puts the acquisition at RM1,067 psf based on existing NLA or a whopping RM2,588 psf based on land area. This site has great re-development potential into a grade A office. Assuming a plot ratio of 10x, efficiency ratio of 80% and selling price of RM1,200 psf, we estimate the GDV to be around RM664m.
Together with its landbank outside Mont Kiara, Sunrise has 863.4 acres (including 772.8 acres of land with no immediate development plan) of undeveloped landbank which will generate an estimated GDV of RM9.7bn.

RIDING OUT THE STORM

Margin erosion
Of late, developers have been plagued by high construction costs due to rising commodity prices, Sunrise is no exception. Since recording EBIT margin of 39.4% in 1QFY08 (which was relatively high due to sale of remaining units in Plaza Mont Kiara including car park bays to Quill Capita Trust), Sunrise experienced q-o-q margin erosion as prices of building materials surged in line with commodities prices. Prices of steel bars in particular rose the most from around RM2,200 per tonne in mid 2007 to RM4,000 per tonne in mid 2008. Since then, steel bar prices have declined to around RM2,800 to RM3,000 per tonne.

We believe further downside risk to margin is limited. Crude oil price has corrected significantly from its high of over US$140 per barrel in July 2008 to under US$60 per barrel now. Prices of other commodities such as steel bar and copper have also declined. However, it is too early to expect overall construction costs to decline as other than steel bars, price escalation of other building materials have merely eased but remain firm, for now at least. In view of a soft property market, developers’ ability to fully pass-on additional cost
to buyers may also be limited. Nevertheless, we expect margin to stabilise in the near term. Reversion of margin to previous level may only happen once the global economic conditions as well as consumer sentiment improve.

Supply shock
The success of Sunrise in Mont Kiara has brought about a problem of its own….the influx of other developers into Mont Kiara. This has resulted in an impending supply shock. According to Regroup Associates, future supply of high-end condominiums coming on stream in Mont Kiara / Sri Hartamas area is staggering at 5,049 units as compared to existing supply of 6,522 units. Against such a backdrop, we expect buyers’ resistance to increasing selling price as the market will take time to absorb the new supply over the next 3
years. Besides competing with one another, developers will also face competition with newly completed units in the secondary market.

UNBILLED SALES PROVIDING CUSHION

Unbilled sales at RM 1.3bn
Sunrise’s unbilled sales of RM1,326m as of June 2008 will provide the perfect cushion during a difficult period ahead. And this does not take into account further conversion of bookings in MK 11 into sales. The RM878m MK 11 has already achieved full bookings for all its non-bumiputra units and has converted RM380m of these bookings into sales as of June 2008. We expect at least another RM230m to be converted in FY2009. Although we have estimated FY2009’s core net profit to come in strongly at RM167.6m as
compared to FY2008’s core net profit of RM113.4m, we are not overly aggressive in our forecast as 71% of the EBIT in FY2009 will be contributed by unbilled sales while the remaining 29% will come from new sales (including further conversion of MK 11 bookings).

Lower sales in FY2009
Although we have estimated sales of RM664m in FY2009, if the expected conversion of MK 11 bookings amounting to RM230m is excluded, new sales will come in lower at only RM434m. Besides sales of unsold units of on-going projects, new sales also come from new launches. Sunrise has planned to launch 3 new projects in FY2009 i.e. MK 28 condominium (GDV: RM880m), Solaris Towers purpose-built office buildings (GDV: RM560m) and its Canadian mixed development project (GDV: RM1,036m). However, the timing of launch remains fluid. Management has indicated that launches may be deferred if market condition
deteriorates further.

Build-then-sell project will drain cash flow
Sunrise’s net gearing has shot up to 51.8% in FY2008. This was due to additional financing required for the construction of its on-going Solaris Dutamas. As Sunrise will be retaining the retail units and car park, this project has not contributed much net cash flow despite churning big chunks of earnings. Going forward, we expect gearing to remain high as Sunrise embarks on a few build-thensell projects. Its maiden project in Canada will be developed in 2 phases with 3 years apart between them. Construction will start in FY2009 but sales will only come in from FY2012 and onwards.
Furthermore, the company has entered into a call and put option agreement with Malaysian Commercial Development Fund for the sale of its MK 20 commercial project for RM767m. While the construction will commence in FY2009, the option is expected to be exercised only in FY2013.

Dividends may be lower
With the expected tight cash flow going forward, Sunrise’s ability to pay dividends may be curtailed. Sunrise did not declare any cash dividends in FY2008 as it chose to distribute its treasury shares on 1-for-25 basis instead. Although management has indicated that it will resume its practice of paying out 35% of its net profit from FY2009, it remained noncommittal and cautioned that actual dividend payout will still depend on market conditions and funding requirements of the company. Against such a backdrop, we took a more
conservative stance and have only imputed a 25% dividends payout in our estimates.

VALUATION AT DISTRESSED LEVEL NOW
Sunrise is currently trading at 3.8x P/E based on FY2009 earnings which is at a steep discount to market P/E of 9.7x. In fact, Sunrise is now trading close to distressed level last seen during the Asian financial crisis in 1998 when P/E dipped to 1.4x. Its current P/BV of 0.7x is also trading close to its historical low of 0.2x. Although these may indicate further downside risk, we believe the current property market down cycle is not as bad as last seen during the Asian financial crisis. Here are our reasons: (1) no liquidity crunch in the
domestic financial system which will induce escalating interest rates, (2) no widespread property foreclosure due to mortgage defaults, (3) property prices have not “runaway” to reach bubble level, (4) no massive job losses as domestic economy is more resilient, and (5) Sunrise’s resilience to ride out a down cycle as it has never registered a loss even during the Asian financial crisis. On this score, we believe the market has over-reacted to the negative sentiments clouding over the property sector by indiscriminately selling down
Sunrise.
We initiate coverage on Sunrise with a BUY call and target price of RM2.32 based on 30% discount to RNAV of RM3.32. A steep discount was ascribed due to (1) uncertain earnings visibility beyond 12 months, and (2) poor market sentiments which may cap share price performance in the near term. At our target price, the implied P/E of 6.6x based on FY2009 earnings is similar to the level seen during the previous “mini down cycles” in 2001 and 2005.

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Commodity Update : November 17, 2008 18 November 2008 Newz Bits

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