A preliminary way of unlocking the value of the healthcare business would be by finding a strategic partner to enter the business. This would not only partially monetize its business but also enhance its business operations through the expertise of a strategic partner which further strengthens its position for listing in the future. We gather that Sunway has participated in the LSS3 bid, with the EPCC contract likely to be handed to SunCon if the contract is won. We expect 2H dividends to be as good as 1H which effectively amounted close to 4.7 sen per share, which would translate to a 5.3% yield. We maintain our forecasts and BUY rating with an unchanged TP of RM2.17 based on a 10% holding discount to SOP-derived value of RM2.41.

We met up with management and came out feeling positive on the company’s prospects. Below are the key takeaways.

Potential healthcare unlocking. A preliminary way of unlocking the value of the healthcare business would be by finding a strategic partner to enter the business. Assuming Sunway is able to fetch RM3.5m per bed, the healthcare division would garner RM2.6bn based on its current number of operational beds. Note that recent transactions in 2019 saw Columbia Asia fetching RM3.35m per bed and Prince Court at RM3.68m per bed. By divesting a portion of the healthcare business to a strategic partner, Sunway would be able to not only partially monetize its business but also enhance its business operations through the expertise of a strategic partner which further strengthens its position for listing in the future.

Property development. To recap, Sunway has revised its GDV launch target for FY19 downwards as the Brookvale launch has been replaced by Sunway Avila (Tower B). Nonetheless, the delay is rather minor (i.e. less than 6 months) and management still maintains its FY19 effective sales target of RM1bn. In addition to Brookvale, Sunway will also be launching its Executive Condo project in Canberra Link (SGD500m) and Phase 3 of the Tianjin project (RM765m) in FY20.

Renewable energy. We gather that Sunway has participated in the LSS3 bid, with the EPCC contract likely to be handed to SunCon if the contract is won. As the LSS3 bidding remains competitive, Sunway is also open to other ways to increasing exposure in the renewable energy space. Earnings contribution from this will likely be minimal at this juncture but it will enhance its ESG position by participating in such environmentally sustainable projects.

Outlook. We expect 2H dividends to be as good as 1H which effectively amounted close to 4.7 sen per share, which would translate to a 5.3% yield (assuming FY19 dividends of 9.4 sen per share). FY20 will continue to soar with higher earnings supported by property development contributions (recognition of Rivercove Residence), healthcare contributions (increased SMC contributions), and the quarry division (growing market share).

Forecast. Unchanged as the meeting was in-line with expectations.

Maintain BUY with an unchanged TP of RM2.17 based on a 10% holding discount to SOP-derived value of RM2.41. Sunway remains our top pick given its well- integrated property and construction segments. Its hidden gem, the healthcare business (with 4 new hospitals coming on stream over the next three years) has yet to be appreciated as it is embedded within the parent-co. These coupled with the resilient earnings from mature investment properties alongside its growing building materials business and quarry operations justifies for the re-rating of the stock.

Source: Hong Leong Investment Bank Research - 5 Dec 2019