Investment Highlights

• We maintain BUY on Sunway with a higher SOP-based fair value (FV) of RM3.30/share (from RM3.16/share previously). Our FV also reflects a 3% premium for our 4-star ESG rating .

• The higher FV is mainly driven by (i) our recently raised fair value for Sunway Construction to RM3.59/share from RM2.66/share, and (ii) increasing FY24F/FY25F core net profit (CNP) by 6%/9% after accounting for stronger- than-expected revenue and pre-tax margin from property development and healthcare segments.

• Our FV implies FY25F PE of 22x, 1 standard deviation above its 5-year median of 15x. We believe the premium to be reasonable considering the rapid growth of Sunway Healthcare, robust construction arm and its exposure to the dynamic Johor property market.

• Sunway’s FY23 CNP of RM699mil came in above our expectation but within consensus. It was 15% above our earlier forecast and 4% above street’s.

• The variance to our forecast was mainly due to stronger- than-expected CNP from property development and healthcare segments.

• In FY23, Sunway’s property development revenue rose by 22% YoY while PBT grew 36% YoY. This was driven by higher property sales and stronger progress billings from new and ongoing local projects. Its strong unbilled sales of RM4bil currently are expected to be recognised progressively in FY24F-FY26F.

• Sunway’s FY23 new sales surged 22% YoY to RM2.4bil, exceeding its earlier target of RM2.3bil . The major sales contributors are its projects from Singapore (39%), as well as Sunway Flora Residences (10%) and Velocity TWO (9%) from Malaysia.

• Sunway’s FY23 new launches of RM4.4bil (4.4x YoY) has surpassed its earlier target of RM3.5bil. The major projects are The Continuum (RM2bil) and Terra Hills (RM700mil) in Singapore.

• For FY24F, management is setting a higher sales target of RM2.6bil (+7% YoY vs actual FY23 sales) on the back of 9 new launches worth RM2.1bil in Malaysia (88%) and China (12%) .

• FY23 property investment’s revenue earnings improved 30% YoY from increased visitors to its theme parks and higher hotel occupancy rates. Excluding the fair value gain on revaluation of investment properties and assets of RM68mil, FY23 PBT declined by 2% YoY due to elevated utility charges and increased manpower costs.

• FY23 revenue of the construction segment rose by 32% YoY while PBT increased 6%. This was mainly attributed to higher progress billings from local construction projects.

• Healthcare’s FY23 share of net profit grew 9% YoY to RM153mil from the improvement in hospital activities, particularly at Sunway Medical Centre (SMC), Sunway City and SMC Velocity, which mitigated the share of start-up operational losses from SMC Penang and Sunway Sanctuary as well as higher operating costs. Notably, SMC Penang, which opened in November 2022, achieved breakeven at profit after tax (PAT) level in 4QFY23. In addition, there was a higher share of additional tax payable of RM18mil following the normalisation of SMC Sunway City’s tax paying status as its investment tax allowance was fully utilised in FY22.

• On a QoQ comparison, property investment, construction and “other” segments posted a stronger PBT. However, property development PBT slid 2% QoQ due to the recognition of a lumpy development profit of RM46mil from its Singapore property development project in the previous quarter.

• Excluding the fair value gain on revaluation of investment properties and assets of RM68mil, 4QFY23 PBT in property investment rose 25% QoQ from higher contribution from the leisure & hospitality arising from the higher visitorship and occupancy during the festive months and school holidays. Meanwhile, the construction segment’s 4QFY23 PBT was 23% higher QoQ due to stronger progress billings of local construction projects. 4QFY23 PBT for other segments rose 15% QoQ mainly due to reversal of provision for impairment of assets of RM20mil for spun pile operation and higher contribution from the community pharmacy business and other businesses.

• Overall, we believe the long-term outlook for Sunway remains bright premised on its:
  
  (i) strong unbilled sales of RM4bil (3x FY24F property development revenue),
  
  (ii) robust outstanding order book of RM5.3bil (3x FY24F construction revenue), and
  
  (iii) upcoming initial public offering of its 84%-owned Sunway Healthcare by 2027, which is expected to be valued at RM13bil-RM14bil.

• The stock currently trades at a compelling FY25F PE of 18x vs. its 5-year peak of 27x.

Source: AmInvest Research - 22 Feb 2024