Sunway announced the proposed acquisition for a leasehold land in Kota Bharu, Kelantan, measuring 3.8 hectares (9.4 acres) for a purchase consideration of RM28.7m. We are positive on this acquisition as the land will be used to develop a 200-bed hospital. As this hospital is still in its early stages of planning, construction will likely only begin next year or in 2022 and span over a duration of 3 years. Estimated development cost stands at c.RM200m which implies RM1m/bed. We maintain our forecast and BUY rating with an unchanged TP of RM1.95 based on a 10% holding discount to a SOP-derived value of RM2.17.

NEWSBREAK

Sunway announced the proposed acquisition for a leasehold land of 99 years (expiring on 2102) in Kota Bharu, Kelantan, measuring 3.8 hectares (9.4 acres) for a purchase consideration of RM28.7m.

HLIB’s VIEW

Positive on the news. We are positive on this acquisition as the land will be used to develop a 200-bed hospital in Kota Bharu, Kelantan. This hospital will be Sunway’s maiden expansion into the East Coast Region and is in line with the overall strategy to expand its network of tertiary hospitals, in particular to locations which lack private healthcare. It is strategically located within 1km from amenities such as Aeo n Mall Kota Bharu, Platinum Wholesale Mall and Tesco Kota Bharu. Sunway remains open for potential land banking opportunities that could have synergies with the development of this hospital.

The construction. As this hospital is still in its early stages of planning, construction will likely only begin next year or in 2022 and span over a duration of 3 years. Estimated development cost stands at c.RM200m which implies RM1m/bed.

Proforma implications. Our pro-forma calculation implies that net gearing would only marginally inch up to 0.44x (from 0.43x as of 1QFY20) or 0.28x after imputing the recent proposed ICPS exercise and disposal of The Pinnacle.

Forecast. Unchanged.

Maintain BUY with an unchanged TP of RM1.95 based on a 10% holding discount to a SOP-derived value of RM2.17. 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 - 29 Jul 2020