Investment Highlights

• We maintain our BUY call on Sunway Bhd (Sunway) with a lower FV of RM1.78 per share from RM1.81 based on SOP valuations (Exhibit 3). We cut our FY20 and FY21 net profit forecasts by 18.6% and 3.1% respectively to reflect the impact of the movement order control (MCO) and the Covid- 19 pandemic, and the timing of recognition and lower construction earnings. We make no changes to our FY22 net profit forecast.

• Sunway reported 1QFY20 revenue and net earnings of RM971.4mil (-13.5% YoY) and RM78.3mil (-42.6% YoY) respectively. After the distribution to holders of perpetual sukuk (RM11.9mil), core PATMI of RM66.4mil (-51.3%) came in below our and market expectations at 11% and 9% of ours and consensus full-year estimates. The lower earnings were mainly due to: (i) the MCO and Covid-19 pandemic which caused disruption in the overall business; and (ii) the adoption of MFRS 15 which resulted in lower recognition of its property development projects in China and Singapore.

• The property development division posted 1QFY20 revenue and PBT of RM139.2mil (+58.4% YoY) and RM39.1mil (+19.1%) respectively. The stronger PBT was mainly due to higher profit recognition and progress billings from local development projects. Sunway reported stronger new sales of RM581mil (+120% YoY) while unbilled sales of RM3.2bil (YoY: RM2.2bil; QoQ: RM2.7bil) will provide good earnings visibility in the short to mid-term.

• The property investment segment registered 1QFY20 revenue of RM134.3mil (-31.7% YoY) and PBT of RM32.0mil (-44.3% YoY). The lower revenue was attributed to a weaker contribution from rental income as a result of the Covid-19 pandemic and the impact of the MCO.

• The healthcare segment chalked up 1QFY20 revenue of RM149.2mil (+17.7% YoY) and loss before tax of RM4.5mil (- 128.9% YoY). The segment’s loss was mainly due to a sharp drop in the number of admissions and outpatient treatments at Sunway Medical Centre as a result of the MCO.

• The construction segment’s 1QFY20 revenue and PBT came in at RM218.0mil (-37.0% YoY) and RM22.6mil (-43.4% YoY) respectively. The weaker performance was mainly due to lower recognition amid the subdued local and overseas market conditions and lower operating margins. YTD, Sunway Construction has secured new jobs worth RM0.7bil while its outstanding construction order book stands at RM5.4bil.
• Sunway has proposed a renounceable rights issue of up to 1.1bil of new irredeemable convertible preference shares (ICPS) on the basis of 1 ICPS per 5 existing shares @ RM1.00 per ICPS. The tenure is 5 years at a dividend rate of 5.25% per annum, payable semi-annually. 50% of the outstanding ICPS shall be converted into new shares on the market day immediately preceding the 4th anniversary of the issue date of the ICPS at the conversion price of RM1.00 per share. The remaining balance of the ICPS shall be converted into new shares on the maturity date at a similar conversion price. The proposals are expected to be completed in 4QFY20.
• To recap, we have cut our FY20–FY21 net profit forecasts by 15% and 13% respectively in our previous sector reports dated 19 March and 9 April 2020 to reflect the impact of the MCO and its spillover effects to the economy and the company’s business. We further reduce our FY20 and FY21 net profit forecasts by 18.6% and 3.1% respectively following our downgrade in Sunway Construction and the adoption of MFRS 15 to reflect the timing of recognition.
• While we do not see any impact of the ICPS on our FV due to the higher cost of the ICPS plus the conversion price as compared to the current share price, we reduce our FV to RM1.78 per share from RM1.81 per share as a result of our FY20–FY21 earnings revision. Despite the temporary setbacks, we believe the outlook for Sunway remains positive premised on: (i) its improving unbilled sales of RM3.2bil; (ii) stable income contribution from property investment; (iii) a robust outstanding order book of RM5.4bil; and (iv) strong growth potential in healthcare business. Maintain BUY.

Source: AmInvest Research - 28 May 2020