Investment Highlights

• We maintain BUY on Sunway with a higher fair value (FV) of RM2.29/share from RM2.27 previously, based on a revised SOP valuation after pegging a higher value on its 40.9%- owned Sunway REIT due to better-than-expected recovery in tenants’ sales at its retail properties. Our FV also reflects a 3% premium for our 4-star ESG rating (Exhibits 4 & 5).

• Sunway’s 1HFY22 core net profit (CNP) of RM296mil beat expectations, making up 57% of our FY22F earnings and 61% of consensus estimate. We raise our FY22F/FY23F/FY24F CNP by 10%/3%/2% to reflect higher rental income from Sunway REIT’s retail properties and stronger earnings contribution from its property investment segment.

• In 1HFY22, its property development revenue rose 82% YoY. This was driven by higher sales and progress billings from completed progress works on ongoing local projects and recognition of revenue from 2 joint-venture companies which were converted into subsidiaries in 1QFY22. However, the segment’s PBT climbed only by 13% YoY due to provisions for higher construction costs, coupled with higher upfront costs incurred on future launches.

• Year to date, Sunway new sales dropped 43% YoY to RM932mil, attaining 42% of its FY22F sales target of RM2.2bil. New sales were contributed largely by local projects (69%), particularly Sunway Belfield (23%) and d'hill (13%) while the remaining came from projects in Singapore (30%) and China (1%) (Exhibit 3).

• The lower YoY property sales were attributed to slower 1HFY22 launches of RM281mil vs. 1HFY21’s RM1.7bil, which were only 12% of its FY22 targeted launch of RM2.3bil. Jernih Residence is the only property launched in 1HFY22, which achieved a take-up rate of 22% (including bookings) as of 30 June 2022.

• We understand from management that the planned launches in both Singapore and China will be deferred to FY23 in view of the delays in the completion of land acquisition in Singapore and weaker property market sentiments in China. However, Sunway remains confident of achieving its FY22F sales target of RM2.2bil from existing projects and upcoming launches.

• Meanwhile, the group’s unbilled sales expanded 15% YoY to RM4.1bil, representing a cover ratio of 4.1x of FY22F property development revenue. Projects in Singapore are the largest contributor at RM2.1bil (52% of group’s total unbilled sales).

• 1HFY22 property investment segment’s earnings swung to the black, driven by higher revenue growth of 2.2x YoY as a result of increased visitorship to its theme parks and improved hotel occupancy rates following the reopening of the economy and less stringent SOPs.

• Higher progress billings from local construction projects drove up 1HFY22 construction revenue by 27% YoY and its pretax profit by 2.5x YoY.

• Following the partial divestment of its stake in its healthcare arm Sunway Healthcare Group (SHG), SHG is now classified as a joint venture (from a subsidiary previously). With effect from 1 January 2022, the share of profit or loss in SHG will be recognised under the equity method of accounting.

• The strong recovery in hospital activities with a higher number of patients treated at both Sunway Medical Centre and Sunway Medical Centre Velocity boosted the segment’s 1HFY22 share of net profit by 53% YoY to RM64mil.

• All in, the results were commendable given that 1HFY22 revenue of all business segments improved significantly.

• On a QoQ comparison, all segments posted stronger 2QFY22 PBT, except for construction which was mainly due to lower progress billings for some local projects.

• We believe the long-term outlook for Sunway remains bright premised on its:
  (i) strong unbilled sales of RM4.1bil (4.1x FY22F property development revenue);
  (ii) a robust outstanding order book of RM4.2bil (2.3x FY22F construction revenue); and
  (iii) expansion plan in its healthcare business (which could increase capacity by 82% in FY23F).

Source: AmInvest Research - 25 Aug 2022