Sunrise-Sime JV makes good business sense

While SUNRISE BHD's recent decision to venture out of its property development forte in the upmarket Mont'Kiara enclave came as a surprise to analysts, the move has received the thumbs-up from them.This is by virtue of Sunrise's good business sense and also in anticipation of less geographical concentration risk amid more business opportunities ahead for the upmarket real estate developer as it expands its operations.On Tuesday, Sunrise and Sime Darby Property Bhd formed a collaboration to jointly undertake a RM1 billion freehold mixed development on 20.95 acres (8.48ha) of land within the Bukit Jelutong enclave in the Klang Valley.Their 50:50 JV company Baywood Avenue Sdn Bhd has acquired the development sites for RM114.08 million or RM125 per sq ft (psf) from the Sime Darby group. Accordingly, Sunrise's share of the purchase price amounts to RM57.04 million.In a note to clients, ECM Libra Investment Research said the JV in Bukit Jelutong made good business sense because there was no major high-rise residential and commercial development there yet.It said the JV allowed Sunrise to replicate its success in developing Mont'Kiara in another prime location. "We believe there is a captive market for the product offerings proposed by the JV," ECM Libra Research said.It said the RM1 billion gross development value (GDV) for the mixed project was deemed a conservative estimate considering that the intended 2.7 million sq ft of built-up area translated into a selling price of RM370 psf. This is lower than Sime Darby's commercial project which commands between RM270 psf and RM1,025 psf.Based on the initial GDV and assuming a net margin of 18%, Sunrise's share of net earnings will be RM90 million over the development period, according to ECM Libra.As Sunrise's revenue, beginning financial year ending June 30, 2011 (FY11), will be recognised only upon completion of the PROPERTIES, instead of via the progress billing method practised currently, ECM Libra foresees that earnings contribution from this new project will start only in FY14.The new revenue-recognition method is based on the International Financial Reporting Interpretation Committee's Interpretation 15 (IFRIC 15) policy which takes effect from July 1.The planned project comprises retail entities, shop offices, office suites and serviced apartments.It will be developed in five phases from 2011 onwards, and is due for completion in seven years from the launch of the first phase.Meanwhile, RHB Research Institute analyst Low Yee Huap said the collaboration had come as a surprise as Sunrise had in the past expressed its preference for a healthier balance sheet and emphasis on its current landbank within Mont'Kiara."We are neutral on this JV as the purchase price of RM125 psf is on par with the asking prices of about RM80 to RM150 psf around that area."However, this JV would allow Sunrise to diversify its landbank (hence, reduce concentration risk) as well as pave the way for future collaboration between Sunrise and Sime Darby Property," Low said.Assuming a profit margin of 30% and development period of seven years, Low said RHB's earnings estimates for Sunrise in FY12 would potentially increase by 1%.OSK Research Sdn Bhd analyst Mervin Chow Yan Hoong said Sunrise's portion, amounting to RM57.04 million of the purchase price for the land, was fair as it accounted for 11.4% of the developer's 50% share of the estimated GDV of RM1 billion for the upcoming project."The alliance, we reckon, is a strategic one as this will enable Sunrise to venture out of its traditional foothold in Mont'Kiara's real estate while Sime Darby will be able to leverage on the former's expertise in developing integrated high-end commercial and residential properties," Chow said.Maybank Investment Bank Research analyst Ong Chee Ting said valuation for Sunrise shares was undemanding and it was the cheapest property stock under its coverage with nearly two-year earnings' visibility.The stock, which trades at a price-to-earnings ratio of 6.8 times FY11 earnings and three quarters (0.75 times) of its revised net asset value (RNAV), is deemed to be under-appreciated."We are positive on this latest development as it paves the way for future collaboration between Sunrise and Sime Darby Property, which has 14,800ha of landbank in the country."Assuming a 20% pre-tax margin, the project will add RM10 million in annual net profits (two sen earnings per share) over a seven-year period, and 11 sen to our RNAV estimate," Ong said. The research house reiterated its buy call with a RM2.86 target price for Sunrise shares.RHB, meanwhile, retained its fair value of RM2.64 and outperform call for the stock while OSK maintained its target price of RM2.29 and neutral recommendation.All three research houses maintained their earnings forecast for Sunrise, pending further clarification from the developer.ECM Libra reiterated its buy on Sunrise and maintained its target price of RM3.30, pending an analysts' briefing today and migration to RNAV valuation method due to earnings volatility from the introduction of IFRIC 15."Sunrise is significantly undervalued and we believe recent positive news flow on new projects and better-than-expected sales in MK 28 (28 @ Mont'Kiara) will narrow the valuation gap," the research house said.