Sunway’s healthcare segment is gaining traction through the acquisition of Multicare Pharmacy together with the possible entrance of a strategic investor (for hospitals). Overall, all of its business units are operating during the total lockdown, albeit at a lower capacity except for theme park and sales gallery. Looking ahead, we believe that all business segments are a poised for a strong rebound in 2H as vaccine rollouts would gain significant traction then. We cut earnings by -19.2%/-5.8% for FY21-22 to account for impact of MCO and timing differences in recognising international property development project earnings due to MFRS 15. We maintain our BUY call. Despite the earnings cut, we raise our TP from RM1.90 to RM2.11 following the removal of 10% SOP discount to reflect the impending value unlocking of its healthcare business.

We met up with management and walked away feeling positive on its prospects. Key takeaways :

Overview of 1Q21 results. To recap, 1Q21 showed weaker results sequentially due in part to MCO2.0. Furthermore, 4Q20 was inflated with lumpy profit recognition from property development. All segments actually performed in line with expectations except property investment. 1Q21 registered property sales of RM1.16bn of which Parc Central and Ki Residence in Singapore accounted for RM865m or 74.6%, and Sunway Belfield KL, registered RM164m sales or 14%. The balance were small contributions from various projects in Malaysia and China. On healthcare, hospital occupancy registered YoY growth as patients (non-critical) still opted to come with SOPs in place.

Impact of current MCO3.0. The group is better prepared in facing MCO3.0 vs MCO1.0 in March 2020. Hospitality and leisure segment is again the most impacted with the theme park being closed while hotels can only be operated for quarantine purposes only. Essential products/services can continue to operate in malls while those classified as non-essential are closed. Construction wise, MRT and LRT-related works continued to go on. Building construction projects with Centralised Labour Quarters (CLQ) are allowed to operate at low capacity as well. Other than that, despite having to close their sales gallery for property viewing and launching, Sunway can still leverage on its digital platform. Furthermore, with rollout of vaccination gaining traction and acceptance, management is hopeful that business will show better recovery into 4Q21. Given its business diversity, we reckon that Sunway is poised to ride on the eventual recovery.

Healthcare. The new Sunway Velocity is progressing well to breakeven at EBIT level by end-2021 and turn profitable in 2022. The two established hospitals (Sunway Medical and Velocity) with a pipeline of hospitals under construction, together with entrance of strategic investor in this healthcare segment, will enhance its contribution going forward.

Pharmaceutical development. The recent acquisition of Multicare Pharmacy with 76 branches, together with Sunway Pharmacy's 12 retail outlets will enhance its regional exposure on pharmaceutical retail. This will complement its development on tele medicine going forward. The enlarged retail outlets will enable the group to enjoy better rebates from key brand suppliers.

Property development. Sales momentum remains encouraging especially in Singapore evidenced from the take up rate of 74% for Parc Central Residence which was launched in Jan 2021. This was in part due to pent up demand on the economic re-opening. Local property market remain resilient with the 1st phase of Sunway Belfield sales registering a 87% take up rate and the newly launch 2nd phase recorded  a strong take up rate of 58% when it was only launched in March 2021. Management is targeting to launch Sunway ARTESSA in Wangsa Maju catered for mid -range market as well as Sunway Damansara Hill catering to mid to slightly upper range market. We expect these new launches to be well received as the development is located at strategic and matured location. This will be supported by the extension of the HOC that will help spur demand in the mid-range market. Given these positive factors, we understand that the group will re-visit its sales target of RM1.6bn.

Property Investment. We understand rental rebates will still be given in 2Q21 on a case to case basis to help tenants to tide over this difficult period. We remain cautious on property investment’ near term outlook as it will continue to remain challenging with high Covid cases. However, we reckon that with rollout of vaccination, an eventual recovery is on the cards.

Construction. Management indicated that any backlog cause by capacity constraints during MCO3.0 will be caught up later once lifted. We expect minimal delay in completion as SunCon will be able to do a construction boost later as what they did previously post MCO1.0. Prospects remain resilient underpinning by outstanding order book of RM5bn with a cover ratio of 3.2x.

Quarry and building materials operations. The group continues to expand on its quarry business. Currently, the segment has a market share in aggregates of 22% in Klang Valley and 15% nationwide. For asphalt, it has a market share of 30% in Klang Valley and nationwide while for interlocking concrete pavers, it has a market share of >70%. Its vitrified clay pipes makes up close to 75% of domestic market demand. Sunway has also a spun-pile operation in Zhuhai, China and Batang Kali, Malaysia. Its operation in China remains healthy at this juncture, leveraging on the picking up in economic activities there. This segment will be well placed to benefit from the rollout of government spending on infrastructure going forward.

Forecast. We cut earnings by -19.2%/-5.8% for FY21-22 to account for impact of MCO and timing differences in recognising international property development project earnings due to MFRS 15. Introduced FY23 forecast at RM647.1m.

We maintain our BUY call with a higher TP of RM2.11 (from RM1.90) based on SOP derived valuation. Despite the earnings cut, we raise our TP from RM1.90 to RM2.11 following the removal of 10% SOP discount to reflect the impending value unlocking of its healthcare business. Sunway has business operations of its own like healthcare which is growing fast and plan for listing with potential market cap larger than Sunway Berhad Besides, the quarry, and manufacturing & trading in building materials operations are also gaining in importance. Sunway remains our top pick given its well integrated property, construction and building material operations. The impending divestment of a 20% stake to a strategic shareholder could reveal the underlying value of the healthcare business and enhance the unit's visibility. This, coupled with the resilient earnings from its 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 - 8 Jun 2021