Overall, there appears to be a recovery in most segments with the exception of the hospitality/leisure operations largely due to closed borders. Nonetheless, we believe when the inter-state borders are opened, we can expect strong recovery from domestic leisure and business travellers. The group recently launched projects of Parc Central Residence and Sunway Bellfield have garnered strong traction, with the take up rate for 70% and 85% respectively (including bookings) in less than three months after the launch. With regards to the potential divestment of the healthcare operations, it currently at the advance stage and we expect some developments soon. We maintain our forecasts and BUY rating with an unchanged TP of RM1.95 based on a 10% holding discount to a SOP-derived value of RM2.17.

We are positive on its prospects post virtual meeting with management. The stock offers a good proxy for economic recovery. Key takeaways :

1Q21 guidance. Management indicated that all divisions except for hospitality/leisure are seeing stronger YoY growth in 1Q21 even with the impact of MCO2.0. Based on past record, 1Q has been the weakest quarter for the group due to public holidays (like CNY). This aside, performances were also impacted by restrictive movement associated with MCO in current year but less severe than 2020. Having said that, the group is likely to record YoY growth. Sequential measurement is not comparable as 4Q is always the strongest quarter.

Property development. Management shared that the recently-launched projects (Singapore: Parc Central Residence; KL: Sunway Bellfield) have garnered strong traction. The take up rate for Parc Central is around 70% while Sunway Bellfield enjoyed 85% bookings with 40% conversion rate. On Sunway Iskandar, we understand there may be a potential prospect of a structural change that would bode well for the future developments of Sunway Iskandar in which it could increase its product attractiveness and enhanced property value.

Property investment. Retail operations have registered positive recovery in terms of footfall and retail sales especially in March. Footfall for its shopping malls has recovered strongly with sales per sq ft for some shopping malls exceeding pre pandemic levels. On hospitality and leisure operations, we believe the operations will gain traction when the inter-state borders re-open.

Healthcare. The newly operated hospital, Sunway Velocity Medical Center (SVMC) is on track to achieve EBITDA breakeven by this 3Q21 and PBT breakeven by 4Q21. This will further enhance earnings of healthcare unit. The potential divestment of up to 20% is at advanced stage and we can expect it to be announced by end-April. From what we gathered, the incoming strategic partner is a reputable party and we believe divestment valuation will be reflective of its prospects given the pipeline of hospitals planned. The proceeds raised will be used to fund the expansion of hospitals. The hospitals in the pipeline are new blocks at Bandar Sunway, Seberang Jaya, Kota Damansara, Ipoh, Kota Bahru, Paya Terobong and Iskandar with an estimated capex of >RM2bn, which will be funded via the new equity money from the divestment, internal funds and some borrowings. Meanwhile, IPO for the healthcare division would be in 6.5 years time. We understand that the valuation of healthcare division could be larger than the current group’s valuation.

Quarry and building materials operations. Quarry operation has recorded improvements in FY20 largely due to pent up demand coupled with new contracts being awarded. Management is focusing on M&A opportunities as the quarry segment has pockets of sales at distressed valuations. Meanwhile, its manufacturing and trading division of building materials is gaining market share, leveraging on picking up in economic activities and weakness of its competitors. 

Dividend policy remains intact. Management clarified that its dividend payout of 20% in FY20 (in the past, the Group has been generous in their payout ratio distributing 40-60% of earnings) as the group remains prudent to conserve cashflows for potential acquisition and M&A opportunities.

Forecast. We maintain our forecasts.

We maintain our BUY call 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, construction and building material operations. Its fast expanding healthcare business has yet to be appreciated as it is embedded within the parent-co. Hence, the impending divestment to a strategic shareholder could reveal the underlying value of the healthcare business. 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.

Sunway-PA (Last price: RM1.27) offers a good value buy with wide discount to mother share. It enjoys an indicative dividend of 5.25 sen a year (stated as indicative to fulfill Shariah status). It will auto convert 50% of holding in 2024 with balance to be converted in 2025.

For those who have risk appetite, Sunway-warrant (Last price: 39.5 sen) offers a good option play with exercise price of RM1.35 in 2024.

Source: Hong Leong Investment Bank Research - 5 Apr 2021