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Monday, July 31, 2017

Sunway - Attractive Warrant With Step-down Mechanism

Author: HLInvest | Publish date: Mon, 31 Jul 2017, 09:03 AM

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Sunway issued a circular with more details on the proposed bonus issue and free warrants. To recap, Sunway had proposed 4 bonus issue of shares for every 3 existing shares and 3 free warrants for every 10 existing shares. The above proposals were approved by Bursa on 24 July and EGM will be held on 30 August to secure shareholders’ approval.

Compared to ordinary free warrants, we opine that Sunway’s free warrants are attractive as the first-of-its-kind fixed annual step-down mechanism of RM0.07 will enhance the value of warrants.

For ordinary warrants, a dividend entitlement on the underlying mother share would reduce the value of the warrants. However, with the step-down mechanism (which is akin to a fixed adjustment of dividend payment to underlying), the value of warrant would be unaffected (if the quantum of step-down is equal to the dividend).

In the case of Sunway, given the annual step-down of RM0.07, the estimated value of the free warrant is RM0.62 (post-bonus issue adjustment) based on Binomial Option Pricing Model , representing a premium of 34%. However, the estimated value of warrants could fetch as high as RM0.73 if based on our TP of RM5.04.

Note that the step-down of 7 sen is higher than our projected dividends for FY18 and FY19 at 4.6 sen and 4.9 sen (post bonus issue adjustment) per share, respectively.

The higher quantum of step-down compared to dividend projection could further enhance valuation of the warrants.

We gather that while Sunway has no immediate plan to utilize the proceeds (~RM1.15bn assuming full conversion) from the conversion of warrants. Hence, any proceeds raised will be used for future working capital or deleveraging.

Risks
Prolonged downturn in property market;
Execution risk.
Forecasts
Unchanged.
Rating

BUY ↔ , TP: RM5.04 ↔
Sunway remains our Top Pick within the sector as we believe it should be rerated and trade closer to its peers such as IJM and Gamuda (refer to Figure #2) given its diversified income stream and declassification from property sector. At a P/E of 13.9x as compared to peers, we opine that it represents a deep value stock with potential assets unlocking and growing healthcare business which are underappreciated.

Valuation

Our TP is unchanged at RM5.04 based on SOP derived valuation with a 10% holding discount .

Source: Hong Leong Investment Bank Research - 31 Jul 2017

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