Highlights

• A recent visit to Sunway Medical Centre (SunMed) has further enlightened us on the plans and capabilities of the underappreciated healthcare business which runs medical centre, home nursing service and retail pharmacy.
• Embarking on multiyear expansions with newly opened Tower C (new wing) of SunMed, which currently houses 620 beds (largest in Malaysia), from 373 just a year ago. Next in the pipeline is the new medical centre in Velocity by 1H19 and Sunway has set its target to achieve a total capacity of 2k beds in 5 years’ time (Figure #4).
• Fast turnaround and seamless expansion. Although the new wing is up and running for less than a year, we understand that it is already generating profit at operational level bucking trend of long gestation period of private healthcare business. A seamless execution is made possible thanks to management’s experience and strong branding.
• Centre of excellence with accolades. SunMed now operates 25 Centre of Excellence across an entire spectrum of healthcare needs. Housing 180 consultation suites, 200 specialist consultants, 12 operating theatres with new advance equipments (Figure #5) and continuing medical education via various collaborations, SunMed is aspired to become the leading medical centre in the ASEAN region.
• Benefit from booming medical tourism. The recent RM30m allocation in Budget 2018 to Malaysia Healthcare Travel Council and Visit Malaysia Year 2020 to promote Malaysia as a top destination for medical tourism are expected to benefit SunMed. Besides, we believe that SunMed is a front runner for the Flagship Hospital Programme given its expertise and unmatched location.
• Cheap entry to healthcare business via Sunway Berhad which is trading at forward P/E of 13x as compared to IHH 46x and KPJ of 23x. Using a price multiple of 25x, the healthcare segment is estimated to fetch a valuation of >RM1.3bn considering the expansion at SunMed is up and running. Besides, a spin-off of healthcare business is also on the cards along the shareholder value creation journey.

Risks

• Execution risk and prolonged downturn in property capping the growth in other segments.

Forecasts

• Unchanged.

Rating

BUY ↔, TP: RM2.25 ↔ #bull# Sunway is our Top Pick within the sector as we believe it

• should be rerated and trade closer to its peers such as IJM and Gamuda (Figure #6) given its diversified income stream and declassification from property sector. At a forward P/E of 13x as compared to peers, we opine that it is a deep value stock with mature investment properties and the underappreciated trading and healthcare businesses.

Valuation

• TP is maintained at RM2.25, based on a 10% holding discount from SOP derived valuation of RM2.50 (Figure #7).

Source: Hong Leong Investment Bank Research - 15 Dec 2017