Sunway will proceed with getting the ICPS Syariah endorsed by SC and there will be no changes in the terms of the ICPS. With regards to the potential divestment of the healthcare operations, there are currently many potential suitors but preference will be given towards partners who can add value in terms of the know-how in the business. Overall, there appears to be a recovery in most segments with the exception of the hospitality operations largely due to the international border closure and reduced MICE activities. Furthermore, cost saving efforts which were carried out in 2QFY20 will be sustained, resulting in a leaner cost structure moving forward. Maintain forecast and BUY rating with TP of RM1.95 based on a 10% holding discount to SOP-derived value of RM2.17.

We Organised a Virtual Meeting With the CFO of Sunway. Below Are the Key Takeaways.

Property development. Sunway has revised its effective sales and launch targets to RM770m (from RM1.4bn) and RM2.1bn (from RM3.3bn) respectively. Management remains positive on the prospects of its upcoming launches with the discounts given in addition to the HOC and low interest rates environment as booking rates have been going steady. Focus will continue to be placed on converting the bookings to sales which will be supported by Sunway’s housing scheme to support purchasers who do not qualify for bank loans.

Foreign property developments. Notably, bulk of the FY20 launches (in terms of value) stem from projects in Singapore which comprises over c.74% of the RM2.1bn. With regards to Singapore, the Parc Canberra (RM560m) project launched back in Feb now has a take-up rate of 82%. Moving into 4QFY20, Sunway will launch Ki Residence (RM1bn) in Singapore which is a private condominium located in Clementi. Guidance from the Singaporean team states that demand for private condominium remains healthy. Over in China, the Phase 3 of the Tianjin development will be launched in FY21 and is Sunway’s only remaining project in China. Sunway remains on track to recognise the RM160m lumpy contribution from the Singapore and China projects by end-FY20.

Property Investment. On the retail operations, management has been seeing a positive recovery in terms of footfall and retail sales. Although the rental support programme still in place (until December), the scheme is given on a case to case basis, largely tied to the performance of the retail sales. Moving forward, rental reversion will likely remain flattish in the upcoming 6 months but will resume to mid single digits over the longer term. With regards to the hospitality operations, near-term outlook remains challenging with occupancy rate trending in the 30%-40% region on average, depending on the locality and hotels (some supported by campaigns carried out). Management views that occupancy is unlikely to go beyond 50% due to the international border closure and reduced MICE activities (hindered by capacity limitations).

To secure Syariah compliance status for ICPS. Sunway will proceed with getting the ICPS Syariah endorsed by SC. As such, the completion of the exercise will likely be pushed back by c.2 months but is still targeted for year-end. The endorsement is more for formalities as there will be no changes in the terms of the ICPS.

Hospitals seeing improvement. The segment is seeing improvements whereby occupancy rate now hovers close to 60-65% as of August (almost 90% of the pre Covid rate) occupancy rate. We note that the surgery and operating theatre also share similar magnitudes of improvements. Management believes the pent-up demand will help improve the overall utilisation rate of the hospitals moving forward.

Potential strategic shareholder in Healthcare. To recap, it was reported that Sunway is looking to divest a stake of 20%-25% in its healthcare unit that could fetch at least USD250m. Based on a 20% stake for USD250m, the healthcare unit is implied to be valued at RM5.2bn which would bring our SOP value to RM2.88. We gather that there are currently many potential suitors for the divestment but preference will be given towards partners who can add value in terms of the know-how in the business. With regards to a potential IPO in the future, Sunway mentioned it will likely be dependent on the strategic partner and the overall direction moving forward.

Other operations. The quarry operations were seen to have recorded improvements recently largely due to pent up demand coupled with new contracts being awarded. The building materials alongside trading and manufacturing operations are also recovering at a moderate pace. Management notes that the rate of recovery of all these segments will be largely dependent on the property development market as well as potential pump priming projects by the government.

A better 2HFY20. Overall, there appears to be a recovery in most segments with the exception of the hospitality operations largely due to the international border closure and reduced MICE activities. Furthermore, cost saving efforts which were carried out in 2QFY20 will be sustained, resulting in a leaner cost structure moving forward.

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 - 9 Sept 2020