Mixed views on Sunway post-ending of PDC deal

PETALING JAYA: Analysts are mixed on Penang Development Corp’s (PDC) abrupt decision to abort the joint development agreement (JDA) with Sunway Bhd’s subsidiary, Umech Land Sdn Bhd, for the development of Batu Kawan Industrial Park 2 (BKIP2).

For Maybank Investment Bank (Maybank IB) Research, there is a possibility that Sunway may not be able to recoup all the costs incurred in relation to the land deal, especially the equity injection into Umech Land.

To date, total incurred cost on the land deal is RM88mil, of which RM23.3mil was injected into Umech Land in exchange for a 70% shareholding in the company.

The remaining RM64.6mil was also paid as a performance deposit to PDC.

The brokerage firm in a note to clients yesterday said, “The JDA termination could result in a loss ranging from RM23mil to RM88mil, which is about 3% to 12% of our financial year 2023 (FY23) net profit forecast for Sunway.”

This could also impact Sunway’s reputation, it added.

It was reported that despite Penang 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 the majority equity structure of Umech Land prior to the announcement.

Sunway had invested RM23mil on Sept 25 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 downpayment of RM64mil or 10% of the land entitlement of RM646mil due to PDC. PDC was also not informed of this change in shareholding, the report said.

It also highlighted the Penang Chinese Chamber of Commerce had concerns over the low price of RM27 per sq ft for the land versus an estimated market price of RM80 per sq ft if the land were to be sold in smaller parcels. The BKIP2 gross development value is pegged at RM3.5bil.

With the contract’s termination, PDC is also expected to issue a request for proposal (RFP) to seek a new collaboration for the development of BKIP2.

However, Sunway in a filing with Bursa Malaysia said it still had not received a formal letter of termination of the JDA from PDC.

On this note, Maybank IB Research said, “We understand that Sunway is still interested in submitting a tender for the BKIP2 development when PDC advertises the RFP.”

Pending further details, the brokerage firm has reiterated a “hold” call on Sunway and maintained its earnings forecast with a share target price (TP) of RM1.92.

CGS-CIMB Research in its latest research report said, “We do not discount Sunway bidding for this land alone, following the JDA termination.”

From a financial standpoint, the research outfit thinks Sunway should be able to recover the majority of the initial down payment of RM64mil.

“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,” it added.

CGS-CIMB Research, which has an “add” call on the stock with a TP of RM2.57, continues to like Sunway as a diversified investment proxy for a robust domestic economy and growing exposure to healthcare.

Downside risks include a slowing economy and rising raw material costs, which may have a negative impact on margins.