• Maintain BUY, with new MYR2.67 TP from MYR2.65, 34% upside and c.3% FY24F yield. We are positive on Sunway’s latest venture to develop Batu Kawan Industrial Park 2 (BKIP 2). As Phase 1 is already well established, we believe demand for Phase 2 will also be encouraging, as upstream and downstream semiconductor and light manufacturing industries would typically operate in a cluster. Given its balance sheet, track record in construction, concrete and quarry business, Sunway is solid enough to undertake this industrial development with the Penang State Government.

• Strategic opportunity in Batu Kawan. Sunway announced that its 70%- owned subsidiary Umech Land has entered into a joint development agreement with Penang Development Corporation (PDC) to develop 558.96 acres of leasehold land into BKIP 2. Under the agreement, the JV should also undertake all requisite infrastructure, public utilities and amenities. In return, PDC shall be entitled to a land entitlement of MYR646m payable on a deferred payment scheme over a period of four years.

• Reasonable land cost. The implied land cost based on the entitlement sum to PDC is about MYR26.50 psf. This may appear to be rather attractive as smaller land parcels at BKIP 1 were transacted at MYR50-60 psf in the past. However, we note that some amount of infrastructure costs will need to be incurred, and as such, the effective land cost would be higher. Tentatively, this new industrial park BKIP2 should comprise factories, industrial lots and commercial components worth a total GDV of MYR3.5bn.

• BKIP 1 is well-established. According to Invest Penang, the 1,151-acre BKIP 1 currently houses 160 companies, comprising a mix of multi-national corporations (MNCs) and local large companies (LLCs). Notable players include Boon Siew Honda, VAT Group AG, SanDisk, Lam Research Corp, Micron Technology Inc, among others. Therefore, we believe there will be natural demand when Sunway starts marketing the new BKIP2 in 2025.

• No changes to our earnings forecasts. Sunway is expected to kick start the ground works and construction of the infrastructure next year, and the maiden launch of BKIP 2 will be in early 2025. Hence, earnings impact would be felt only from FY26.

• Valuation. Our RNAV estimate is raised slightly as we impute the incremental value from BKIP 2. Our SOP valuation includes an 8% ESG premium given our 3.4 ESG score for the company.

Source: RHB Securities Research - 29 Sept 2023