The recent acquisition of Blacktop Industries further establishes Sunway’s position in the quarry space. Moving forward, we believe contributions from the Healthcare segment to sustain given the improved contributions of SMC3 offsetting the initial losses of the upcoming hospital. After further clarification with management, we note that FY19 contribution from the Tianjin project is estimated to contribute approximately RM55m to earnings, as opposed to our previous estimate of RM85m. On the local front, property development contributions are expected to remain relatively flat YoY. We decrease our forecasts for FY19/FY20 by -8.7%/-11.4%, respectively as we had previously overestimated the contributions from the overseas and local projects. Maintain BUY with an unchanged TP of RM2.18 based on a 10% holding discount from SOP-derived valuation of RM2.42.

Regaining strength in the quarry business. Recall that on 30 March, Sunway entered into a SSA to acquire Blacktop Industries (BISB), increasing the total number of quarries under Sunway’s operations to 8 (from 6) and premix plants to 22 (from 13). The quarries produce aggregates, a core component in the production of asphalts; asphalts are subsequently used mostly for the construction of roads. The quarry business was Sunway’s forte, until it had to be sold to Hanson during the economic crisis of 1998 to cut debts. Sunway then re-entered the quarry business in 2005, with only 3 quarries. Pre-acquisition of BISB, Sunway has a market share of 10% in Klang Valley and 6% nationwide. We remain positive on this business as we expect it to contribute handsomely in the longer term, once the industry improves.

Healthcare contributions to sustain. Moving forward, the Healthcare segment will be reported as a standalone segment, as opposed to being grouped under the Others segment. As the upcoming Sunway Velocity Medical Centre is expected to commence only in mid-2019 (at earliest), the increasing contribution from SMC3 should be sufficient to offset the initial operating losses of the new hospital in FY19. As such, we believe the reported PBT of c.RM60m recorded in FY18 will be sustained in FY19.

Property development. After further clarification with management, we note that FY19 contribution from the Tianjin project is estimated to contribute approximately RM55m to earnings, as opposed to our previous estimate of RM85m. We gather that there is still room for further projects in Tianjin, with higher selling prices to be determined by authorities. On the local front, property development contributions are expected to remain relatively flat YoY.

Healthy portfolio of investments to be monetised. With over RM2bn worth of matured investment properties, Sunway has ample room in monetising its assets via disposal to Sunway REIT. The asset unlocking exercises will only be carried out as and when needed i.e. to fund capex and prevent breaching the threshold net gearing of 0.5x.

Forecast. We decrease our forecasts for FY19/FY20 by -8.7%/-11.4%, respectively as we had previously overestimated the contributions from the overseas and local projects, after clarifying with management.

Maintain BUY with an unchanged TP of RM2.18 based on a 10% holding discount from SOP-derived valuation of RM2.42 (Figure #2). Our TP remains unchanged as the impact of the lowered earnings forecast was offset by the increase in TP of Sunway REIT from RM1.70 to RM1.76. 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 - 9 Apr 2019