Highlights

• We recently met up with Sunway's management and below are the key meeting takeaways.
• Property development. Integrated development is likely to stay strong in the current market landscape and Sunway is ready to capture the upturn should property market stage a recovery. Launches of RM2bn is targeted for FY18 (+82% yoy) while sales target is set at RM1.3bn (+8.3% yoy).
• We note that the FY18 earnings for property segment is likely to sustain or experience a mild retraction in the worst case scenario, supported by the current unbilled sales of RM976m (~0.9x cover) and increase contribution from JV projects in both Singapore and Tianjin.
• Construction to remain rosy with a high orderbook of RM6.1bn (a strong cover ratio of 3x) after 12% yoy earnings growth in FY17.
• Recurring income from property investment and SREIT (HOLD, RM1.80) are expected to be resilient. Office towers in Sunway City are enjoying near-full occupancy while Sunway Pyramid Hotel is expected to perform better after the refurbishment, along with maturing Sunway Velocity.
• Expansion of healthcare business is on track with 240 beds at SunMed in Velocity and is expected to be ready by 1H19, following the successful 245-bed expansion at Sunway City. Sunway is aspired to boost its room inventory to 2k beds in 5 years from existing 618 beds.
• Trading and manufacturing as well as building materials businesses are currently undergoing high growth, having registered double digit growth in FY17, banking on the focus on upstream manufacturing, new agency lines and regional expansion in Asia Pacific.
• Low cost of capital. The perpetual non-call 5-year IMTNs of RM200m was recently issued at a profit rate of 5.5% p.a., which is an attractive term under the rising interest rate environment, enabling them to have an edge over their competitors and keeping the gearing in check, underlining their capital management capabilities.

Risks

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

Rating

BUY ↔, TP: RM2.30 ↔

• Reiterate BUY given the recent weakness in share price in view of the resilient business model and earnings prospect. At a forward P/E of 11x as compared to peers, we opine that it is a deep value stock with mature investment properties while trading and healthcare businesses are under appreciated. Sunway remains our Top Pick.

Valuation

• TP is maintained at RM2.30, based on a 10% holding discount from SOP derived valuation of RM2.56 (Figure #4).

Source: Hong Leong Investment Bank Research - 28 March 2018