Sunway Holdings Bhd  (Sept 22, RM1.79) Maintain buy at RM1.77 with target price of RM2.61: Sunway Holdings announced on Sept 21 that its wholly owned subsidiary Sunway Construction Sdn Bhd (SunCon) has entered into a deed of mutual termination with LCL Corp Bhd (LCL) to mutually terminate the shareholder's agreement which was signed on Oct 21, 2009.

To recap, the shareholder's agreement was signed for the purpose of forming a joint venture company, Sunway Interiors Sdn Bhd, to source interior works such as interior fit-out (IFO), system furniture and customised joinery systems for potential IFO projects in Abu Dhabi. SunCon held a 60% stake in Sunway Interiors while LCL held the remaining stake.

Concurrent to the termination of the shareholder's agreement, Sunway Holdings has acquired LCL's 40% stake in Sunway Interiors for RM4,000. We are not surprised by this development as LCL had been severely affected by the Dubai debt crisis, resulting in a default on its loan obligations in December 2009.

As Sunway Interiors is dormant and has not taken on any projects since inception, the termination of the shareholder's agreement will not have any impact on the group.

In a separate announcement, the group has proposed an issuance of up to RM500 million in nominal value of commercial paper/medium-term notes (CP/MTN) for a tenure of up to five years.

We understand that a portion of the CP/MTN programme will be used to refinance its existing term loans of approximately RM290 million.

Furthermore, we believe that the group is making arrangements for other financing facilities, which suggests that it may be making more opportunistic landbank acquisitions.

Sunway remains our top 'buy' for the construction sector. This is premised on: (i) strong earnings growth of 67.6% in FY2010; (ii) undemanding forward PER valuation of 7.7 times; (iii) more landbank acquisitions in the pipeline; and (iv) strength in securing overseas construction contracts.

Our target price is unchanged at RM2.61, derived from 10 times PER on mid FY2011 EPS.

This is further supported by sum-of-parts valuation of RM2.87. - ECM Libra Investment Research