CGS-CIMB Research notes that Sunway’s 559-acre BKIP2 land deal has been aborted, as reported by the Edge today (Oct 18).
In its Company Flash Note, it in the view that while the land price was attractive, it removes a key overhang.
“We think Sunway will be able to recover the majority of the RM64 million initial payment. We reiterate Add and TP of RM2.57 (10% discount to SOP).
Meanwhile, the note also deliberate the report on about BKIP2 land deal by the financial daily.
Based on the report, on Oct 17 that Penang Development Corporation (PDC) is ending its collaboration agreement with Umech Land (in which Sunway has a 70% equity stake) for the development of the 559-acre Batu Kawan Industrial Park 2 (BKIP2).
Sunway had announced this land deal on 27 Sep. The land was supposed to have a GDV of RM3.5 billion and to start development in early-2025F.
Despite Penang’s Chief Minister Chow Kon Yeow (who is also PDC Chairman) being supportive of the deal previously, the reason for its cancellation is the change in majority equity structure of Umech Land prior to deal announcement, the Edge said.
According to an Edge weekly article dated 15 Oct Sunway had invested RM23 million on 25 Sept for a 70% equity stake in Umech Land, just two days prior to the announcement of the land deal.
On top of this, Sunway had made a total down payment of RM64 million (10% of the land entitlement of RM646 million due to PDC). PDC was not informed of this change in shareholding, the report said.
The Edge also highlighted that the Penang Chinese Chamber of Commerce had concerns over the low price of RM27 psf for this land (vs. an estimated market price of RM80psf if the land were to be sold in smaller parcels).
CGS-CIMB Research notes that in response, Sunway in a filing to Bursa Malaysia said it has yet to receive a formal letter of termination of the Joint Development Agreement from PDC.
“With this termination, PDC will advertise for a request for proposal to develop the said land according to the Edge article today. We do not discount Sunway bidding for this land alone.
“We think there is a certain amount of reputational damage on Sunway with this land deal given the controversies behind it. From a financial standpoint, we think it should be able to recover the majority of the initial down payment of RM64 million.
“While this acquisition would have increased its industrial landbank to 21% of its total outstanding landbank (from 7%) and provided the group a foothold in the industrial landbank space in Penang, this will also remove a key overhang on the stock.
On the Add rating and TP of RM2.57 based on a 10% discount to SOP, CGS-CIMB Research says that it favours Sunway as a diversified investment proxy for a robust domestic economy and growing exposure to healthcare.
“However, the key downside risks are a slowing economy and rising raw material costs which may have a negative impact on margins.
