Bloomberg news reported that Sunway is looking to divest a stake of 20%-25% in its healthcare unit that could fetch at least USD250m. We are positive on the news as it will give benchmark valuation to its healthcare unit. Based on this news, the healthcare unit is implied to be valued at RM5.2bn. By imputing RM5.2bn for the healthcare segment into our SOP, our TP would amount to RM2.59. The RM5.2bn would also imply a forward PE of c.75x in comparison to IHH’s c.61x. We note that this implied premium has likely taken into account the upcoming income streams from the expansions over the next 3-4 years. 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

Bloomberg news reported that Sunway Bhd is looking to divest a stake of 20%-25% in its healthcare unit that could fetch at least USD250m. The proceeds will be used for hospital expansion and the non-binding bids are expected to close as soon as next month. Nonetheless, the article mentions that deliberations are still ongoing and the process may not necessarily lead to a deal.

HLIB’s VIEW

Positive on the news. We are positive on the news as it will give a benchmark valuation to its healthcare division as we believe the market has yet to fully appreciate the value of this unit. Furthermore, this figure implies a much higher valuation for the segment vis-à-vis the one imputed in our SOP. We gather that these strategic shareholders will be one that can help to enhance its healthcare operation, aside from assisting on funding. As the article mentioned that the process may not necessarily lead to a deal, we believe Sunway management has to be comfortable with the bidders in creating value and not just based solely on bid valuation.

Pro forma implications. Based on a 20% stake for USD250m with an exchange rate of RM4.17 per USD, the healthcare unit is implied to be valued at RM5.2bn. By imputing RM5.2bn for the healthcare segment into our SOP (10% holding discount), our TP would amount to RM2.59 as shown in Figure#2. The RM5.2bn would also imply a forward PE of c.75x in comparison to IHH’s c.61x. We note that this implied premium has likely taken into account the upcoming income streams from the expansions over the next 3-4 years. To recap, Sunway is targeting to have c.2k beds by 2024 (from 741 as of FY19).

Forecast. Unchanged.

Maintain BUY 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 - 4 Sept 2020