The management is still assessing the planned launches for 2020 (effective launch target: RM3.3bn) and will likely announce its revised numbers later in the month. Notably, SMC would have recorded much stronger earnings YoY if it was not for the Covid-19 impact whereby hospitals have seen a decrease in business volumes. With regards to SMCV, management expects it achieve EBITDA breakeven by end-2020 or 1Q21 and targets a PBT breakeven by end- 2021. We decrease our FY20/21/22 earnings forecasts by -22.8%/-2.9%/-5.6% and maintain BUY with a lower TP of RM1.95 based on a 10% holding discount.

We organised a virtual meeting with the CFO and MD of the Property Development Division of Sunway. Below are the key takeaways.

Property development. Management is still assessing the planned launches for 2020 (effective launch target: RM3.3bn) and will likely announce its revised numbers later in the month. Regarding the projects in Singapore (which comprises bulk of targeted launches i.e. RM2.44bn), the revised launches will also be dependent on the SOPs implemented post-Circuit Breaker. The likelihood of potential pushovers to 2021 will be those initially planned for launch in year-end 2020. On the China operations, Tianjin has one project left in its pipeline targeted to launch in 2021 and Sunway remains open to land banking if a good opportunity arises. We gather that the property development industry alongside REHDA are engaging closely with the government with regards to penalty deferments due to Covid-19. Nonetheless, Sunway remains relatively unaffected as the majority of its projects are actually ahead of schedule with no projects due within the upcoming 3 months.

Healthcare. Notably, SMC would have recorded much stronger earnings YoY if it was not for the Covid-19 impact, whereby hospitals have seen a decrease in business volumes. Nonetheless, the number of elective surgeries have recently started to increase, as utilitsation picked up to about 50%-55% from its low of <20%. Utilisation is expected go back to 70% and offset the shortfall in 1H20 earnings, assuming things normalise without a second wave of outbreak. With regards to SMCV, management expects it achieve EBITDA breakeven by end-2020 or 1Q21 and targets a PBT breakeven by end-2021 (SMCV recorded an operating loss of -RM12m in 1Q20). The upcoming ICPS proceeds will see an allocation of RM200m towards the development of hospitals. Management is still open to other avenues of funding e.g. IPO and partial divestment but notes that the group will provide a more definite answer at an appropriate time on how they will take the healthcare group forward. To recap, Sunway targets to have 2,000 hospital beds by 2024 (from 735 currently, excluding the additional 122 beds capacity from SMCV)

Hospitality and Leisure. The peak period of the Leisure operations is during 4Q20 and assuming things normalise, pent up demand and visitors are expected to be strong then. The Hotel segment is expected remain weak in the mean -time as its recovery may not be as strong as the other segments.

ICPS. The proposed exercise allows for the Group to fortify its balance sheet and provide ready capital as and when M&A opportunities arises. It will be converted on a 1-to-1 basis to the mother share with no further cash outlay upon the conversion on both 4th and 5th anniversaries (50% each). With the proposed ICPS issuance, there may also be a potential 9-10 sen downward adjustment on the warrant exercise price which will be subject to further confirmation. The amount of proceeds to be generated stands at c.RM1bn and our proforma calculation implies net gearing would improve to c.0.32x from 0.43x (as of 1QFY20). As the ICPS provides a yield of 5.25% per annum, we believe shareholders should subscribe to this exercise as it provides a decent yield in the near-term while providing for deep value equity participation in the future.

Source: Hong Leong Investment Bank Research - 10 Jun 2020