■ We reiterate Add, raising FY24-FY25F EPS and SOP-derived TP to RM2.57.

■ We think Sunway is likely to unlock the healthcare business only in 2026F; its current focus is on maximising market cap potential with possible M&As.

■ We see more launches for Medini land once conversion to freehold happens.

Unlocking of healthcare still the larger sustainable catalyst

Sunway’s share price has re-rated YTD on positive news surrounding its Johor land bank and potential economic activity in the state, such as the potential Johor Bahru-Singapore Rapid Transit System (RTS). However, in our view, the larger and more sustainable catalyst is the initial public offering (IPO) for Sunway Healthcare Group (SHG), which we now expect to take place by 2026F vs. our earlier expectation of 2025F. We sense the key factor to expediting this is maximising valuation by expanding market capitalisation via M&As and not compromising on valuations. In late-Aug 23, management alluded to a listing EV/EBTIDA multiple of 20x (15.8x in our SOP) and EBITDA of RM800m-900m, implying EV of RM16bn-18bn (RM7.2bn in our SOP). We believe SHG’s strength and execution expertise are demonstrated by the increase in its 1H23 revenue and pretax profit by 38% yoy and 29% yoy, respectively, despite start-up losses from SMC Penang and Sunway Sanctuary. We expect SMC Penang to be pretax profit positive by 4QCY23F, within a year of opening compared to typical gestation periods for medical facilities of 3-4 years. We also believe the scheduled opening of two new hospitals (Fig 3) will expedite the IPO.

Property presales outperforming; cementing Johor exposure

Property presales for 1H23 were RM1.5bn, tracking ahead of Sunway’s RM2.3bn guidance for FY23F. Sunway’s land bank of 1,770 acres in Johor (Pendas and Medini) may be a prime beneficiary of the Johor-Singapore special economic zone, RTS Link and the possible revival of the Kuala Lumpur-Singapore High Speed Rail (HSR), in our view. Sunway appears to be cementing its position in Johor and announced in mid-Aug 23 it is in the process of acquiring the remaining 40% of the total 1,079 acres in Pendas Johor it does not own from Iskandar Investment Authority (IIA). It had total landbank of 3,308 acres (GDV of RM51bn) at end-Aug 23, with 49% and 57% in Johor in terms of acreage and GDV (Figs 4, 5 and 6). Sunway will be stepping up launches for its 691-acre Medini land bank once it obtains approval from IIA to convert the land from leasehold to freehold, it said. It expects this to be completed by year-end, giving it better pricing power.

Raising earnings and TP; reiterate Add rating

We raise our FY24-FY25F EPS by 1-3% to in factor in lumpy profit recognition for two executive condominium projects in Singapore given more clarity on completion times. Our SOP-derived TP is also lifted to RM2.57 for its land bank acquisitions and narrower 15% discount to RNAV for property (vs. 30% previously). We like Sunway as a diversified investment proxy for a robust domestic economy and growing exposure to healthcare. Key downside risks: a slowing economy and rising raw material costs.

Source: CGS-CIMB Research - 11 Sep 2023