Sunway continues to focus on growing its healthcare business with 4 new medical centres in the pipeline in the next 5 years. Number of beds is expected to increase to 1,480 (from the existing 618 beds) with the expansion. FY19 effective sales target has been set at RM1bn, while effective indicative launches at RM1.7bn. With new medical centres in the pipeline and possible quarry expansion moving forward, we do not discount the possibility of further asset unlocking exercises. Maintain forecast and BUY rating with an unchanged TP of RM2.18 based on 10% holding discount from SOP-derived valuation of RM2.42.

We met up with Sunway’s management and came out feeling positive on the company’s prospects.

Sunway Medical Centre (SMC). SMC which located in Bandar Sunway, houses 618 beds and 200 specialist consultation suites. We understand SMC is undergoing a Phase 4 expansion (c.RM800m) which will house 450 units of assisted living studios (i.e. essentially an aged care facility), targeted to be completed in 2021. This expansion will be synergistic to SMC as it is located right above the medical centre, providing convenient accessibility to its residences. As of now, SMC’s inpatients consist of mostly insurance patients (c.85%) as opposed to medical tourism.

New medical centres. Sunway continues to focus on growing its healthcare business over the next 5 years with 4 new hospitals in the pipeline (Figure #1). By 1H19, we can expect the number of beds to increase to 858 (from 618 currently) with the completion of Sunway Velocity Medical Centre in Cheras. Further expansions in Seberang Perai, Damansara, and Ipoh are expected to fetch a further 630 beds, effectively increasing total number of beds to 1,480. We note that CAPEX incurred for tertiary hospitals are estimated to be between RM1.1m-RM1.2m per bed.

Property development. The company successfully achieved its effective sales target of RM1.5bn for FY18 and has guided for a more conservative target of RM1bn for FY19. The effective indicative launches (i.e. adjusted for stake) remains relatively flat YoY at RM1.7bn for FY19 (FY18: RM1.6bn), with a large portion arising from the project in Brookvale, Singapore (RM1bn).

Landbank. Sunway has a total of 3,289 acres (143.3m sqft) of landbank available for development, which amounts to RM56.8bn GDV (effective GDV: RM37.6bn) for a development period over 15 years. With regards to the region composition, Johor accounts for over half of the landbank and GDV, while Klang Valley comes in second (Figure #4).

Active capital management. Sunway’s active capital management allows for better control over its gearing position, preventing it from surpassing the threshold net gearing of 0.5x. Recall that the recent disposal of Sunway University (RM550m) to Sunway REIT had been carried out in order to fund working capital and CAPEX. With new medical centres in the pipeline and possible quarry expansion moving forward, we do not discount the possibility of further asset unlocking exercises; Sunway’s matured investment properties fetches over RM1.5bn.

Forecast. Unchanged as the meeting yielded no major surprises.

Maintain BUY with an unchanged TP of RM2.18 based on a 10% holding discount from SOP-derived valuation of RM2.42 (Figure #5). Despite the down cycle of both property development and construction sectors, we continue to like its resilient integrated real estate business model and earnings growth prospect with mature investment properties and underappreciated trading and healthcare businesses.

Source: Hong Leong Investment Bank Research - 28 Jan 2019