Investment Highlights

• We maintain our BUY recommendation on Sunway with a higher SOP-derived fair value of RM2.20/share (vs. RM1.98/share previously), which also reflects a 3% premium for our 4-star ESG rating (Exhibits 1 and 2).

• Our higher SOP stems from the group’s healthcare division’s higher equity valuation of RM4.7bil, 43% above our previous SOP valuation of RM3.3bil, which was based on FY22F PE at 25x. This pegs the division’s FY22F target PE at a higher 30x (albeit at a 21% discount to IHH Healthcare’s FY22F PE of 38x), and even with a lowered equity stake of 84%, translates to a higher valuation of RM3.9bil, 34% of our SOP valuation.

• The healthcare division’s revaluation is due to the group entering into a share subscription to sell an effective stake of 16% in Sunway Healthcare for RM750mil cash to Greenwood, a wholly-owned subsidiary by Government of Singapore Investment Corporation (GIC).

• The deal, comprising 100mil (8.2%) ordinary shares and 10mil (7.8%) irredeemable convertible preference shares (ICPS), is expected to be completed through 5 tranches within 3.5 years until 4Q2024.

• The implied valuation from the sale has raised Sunway’s SOP by 6% to RM11.5bil. Additionally, this will enable the group to enjoy an estimated one-off gain of RM2.3bil arising from the stake sale, which is 4x our FY21F net profit.

• Even though the group will own an equity stake of 84% in Sunway Healthcare, the division will be deconsolidated and equity accounted as a jointly-controlled entity given GIC’s substantive management influence.

• Based on Sunway Healthcare division’s net debt of RM1bil, sale proceeds and one-off gain, we estimate that Sunway’s FY21F net gearing will improve to 21% from 44% currently.

• Hence, we are positive on this development which is a launching pad for the healthcare arm’s proposed Initial public offering (IPO), targeted for completion by 31 Jan 2028. Additionally, the market capitalisation of Sunway Healthcare is expected to double over the next 6–8 years to RM9.4bil (19% of IHH Healthcare’s current market cap) based on an IRR of 12.5%, the minimum guarantee to GIC.

• With the renewed strategic partnership, management is able to leverage GIC’s international experience and much stronger financial strength for Sunway Healthcare’s expansion plans, which could require additional capex of RM2bil over the next 3–5 years.

• Currently, the healthcare revenue is mainly derived from 2 medical centres i.e. Sunway Medical Centre (Tower ABC) in Bandar Sunway and Sunway Medical Centre Velocity in KL City Centre, containing 616 and 240 hospital beds respectively. There are 7 hospital projects in the pipeline with the earliest targeted for completion in 1H2022 involving the expansion of Sunway Medical Centre (Tower DEF) in Bandar Sunway.

• We make no changes on our FY21F–FY23F earnings forecast until the subscription process is completed within 3.5 years from now. We believe the long-term outlook for Sunway remains positive premised on its: (i) strong unbilled sales of RM3.3bil (5.5x FY21F property development revenue); (ii) a robust outstanding order book of RM5bil (2.5x FY21F construction revenue); and (iii) expansion plan in its healthcare business (which could increase capacity by 82% in FY23F).

Source: AmInvest Research - 24 Jun 2021