Sunway reported 1HFY20 core PATMI of RM76.4m (-69.4% YoY). Effective sales stood at RM586m (76% of revised target). Note that Sunway has revised its effective sales and launch targets to RM770m and RM2.1bn respectively. Effective unbilled sales stood at RM2.5bn (4.6x cover ratio). On the healthcare segment, SMC’s latest utilisation now hovers close to 65% from its low of <20% previously. 2HFY20 will be supported by the handover of overseas projects of RM160m to the bottom-line. We increase our FY20/21/22 forecasts conservatively by +1.2%/+1.1%/+0.4% and maintain BUY with an unchanged TP of RM1.95 based on a 10% holding discount.

Slightly above. Sunway reported 2QFY20 core PATMI of RM7.4m (-89.3% QoQ, - 93.4% YoY) bringing 1HFY20 core PATMI to RM76.4m (-69.4% YoY) which forms 19.7% and 17.3% of our and consensus full year forecasts, respectively. Despite only forming 19.7% of our estimates, we deem the results slightly above expectations as 2QFY20 had better-than-expected contributions from the Property Development segment while 2HFY20 will be supported by the handover of overseas projects of RM160m to the bottom-line. 1HFY20 core PATMI was derived after excluding - RM26.5m in EIs (-RM16.5m revaluation loss and -RM10m of impairments).

Dividends. None declared (2QFY19: 4.57 sen per share, inclusive of treasury share).

QoQ/YoY. Core PATMI fell -89.3%/-93.4% to RM7.4m from lesser revenue sources due to MCO coupled with unavoidable operating costs. Nonetheless, most of the segments remained profitable with the exception of Property Investment, Quarry and Healthcare (largely stemming from SMCV).

YTD. Core PATMI dropped -69.4% to RM76.4 on the back its operations impacted by MCO coupled with lower contributions from its associates.

Property development. New effective sales of RM64m was achieved in 2QFY20, bringing 1HFY20 to RM586m (76% of revised target). Note that Sunway has revised its effective sales and launch targets to RM770m (from RM1.4bn) and RM2.1bn (from RM3.3bn) respectively as seen in Figure#3. Effective unbilled sales stood at RM2.5bn, representing a strong cover ratio of 4.6x on FY19’s property revenue.

Construction. SunCon reported 1HFY20 core earnings of RM4.6m (-74% QoQ, -86% YoY) while current orderbook stands at RM6.3bn which implies a healthy cover of 3.6x on FY19 construction revenue.

Healthcare. The overall performance was impacted by the Covid-19 fear as number of admissions and outpatient treatments dropped with elective surgeries being postponed. The segment reported a net loss of -RM16m (1HFY20 net loss -RM20.4m) as it was further impacted by SMCV registering an operating loss of -RM9.5m (1HFY20: - RM21.5m). On a brighter note, SMC’s latest utilisation now hovers close to 65% from its low of <20% previously.

Outlook. We expect a strong earnings recovery in 2HFY20 as it will be underpinned by the block recognition of property projects delivered in Singapore (RM120m) and Tianjin, China (RM40m) in 4QFY20. This is further supported by the normalisation of construction activities by SunCon, Leisure & Hospitality division (theme park operating from July onwards), retail malls and Healthcare division. Separately, the group will hold the EGM on the approval of ICPS on 2 Sept. The offering of ICPS is attractive given the dividend yield of 5.25% based on primary shares.

The hidden gem. Sunway’s hidden gem lies in the healthcare sector with its concerted efforts to build new hospitals and expanding the established Sunway Medical. We gather that the group will likely invite strategic shareholders to expedite the development of the Healthcare division prior to a potential separate listing in later years.

Forecast. We increase our FY20/21/22 forecasts conservatively by +1.2%/+1.1%/+0.4% as we impute better contributions from the Property Development segment, given the resumption of construction works, pending further clarity on the magnitude of its recovery.

Maintain BUY but with an unchanged TP of RM1.95 based on a 10% holding discount to SOP-derived value of RM2.17. Sunway remains our top pick in the property sector given its well-integrated property and construction developments. The value of the healthcare business (with new hospitals and the SMC expansion coming on stream over the next three years) has yet to be appreciated as it is embedded within the parent - co. This, coupled with the resilient earnings from matured 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 - 26 Aug 2020