THE planned initial public offering (IPO) of Sunway Construction Group Bhd (SCG), the construction arm of conglomerate Sunway Bhd, is expected to be highly beneficial to the latter’s shareholders. SCG’s listing will entail a distribution of its shares to Sunway’s shareholders by way of dividend-in-specie of one SCG share for every 10 Sunway shares held.

Given SCG’s order book of RM3.3 billion, investors may be keen to secure the IPO shares by snapping up Sunway (fundamental: 1.9; valuation: 3) shares to be entitled to the dividend. This could mean limited downside risk for Sunway-WA, which is both a cheaper entry into the underlying share and an attractive short-term trading opportunity to cash in on SCG’s planned listing by the first half of this year (1H2015).

The company-issued warrant carries a strike price of RM2.50 and a one-to-one conversion ratio. It expires on Aug 17, 2016.

Over the last one year, the warrant has gained 17% and closed at 75 sen last Tuesday, outperforming the broader market. The mother share gained 26% over the same period as investors reacted favourably to the proposed listing of SCG, which was announced last September.

Sunway-WA is now trading at close to zero premium to its underlying share compared with 15% a year ago, indicating active buying interest.

SCG, which already boasts contracts awarded by its parent company, saw total new orders of RM1.05 billion in 2014 alone, which gives it several years of earnings visibility. On Dec 29, it secured a RM169.86 million contract to design and construct the proposed Coastal Highway Southern Link in Johor.

AmResearch’s RM3.60 target price for Sunway’s stock implies an 11% upside from its Jan 20 close of RM3.24. Assuming zero premium, Sunway-WA would theoretically be worth RM1.10 (RM3.60-RM2.50) or have a 46% upside if the mother share reached AmResearch’s fair value.

Apart from the 1-to-10 share dividend, there is also the potential of a special cash dividend to be distributed from SCG’s listing proceeds, which heightens the appeal of Sunway and Sunway-WA.

“The cash and share dividend components arising from SCG’s 1H2015 listing offer a potential yield of 13% for Sunway’s shareholders,” says AmResearch analyst Thomas Soon in a Jan 2 note.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.

This article first appeared in The Edge Malaysia Weekly, on January 26 - February 1, 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.