The new SMCV is progressing well to breakeven at PBT level by end-2021 and turn profitable in 2022 attributable to its resilient occupancy rate. For property development, we gathered that July and August property sales were impacted due to weak sentiment during lockdown period; nevertheless, management is confident of achieving FY21 sales target of RM2.2bn. Meanwhile, 80% of its tenants are operating since the easing of restrictions and is expected to boost stronger retail activities moving forward. All in, we expect a strong 4Q21 to cushion the weak 3Q21 following the encouraging nationwide vaccination rate to drive the economy recovery. We maintain our forecast and BUY call with an unchanged TP of RM2.58 based on SOP-derived valuation.

We had a virtual management recently and remain positive on its prospects. Key takeaways :

2H21 outlook. While 3Q21 is expected to be weaker QoQ due to longer restrictions from NRP Phase 1, management assured that it will not be as bad as in 2Q20 during the stricter MCO 1.0. We gathered that it will still be a profitable quarter vs loss making in 2Q20. Overall, we expect a strong 4Q21 to cushion the weak 3Q21 following the encouraging nationwide vaccination rate to drive the economy recovery.

Healthcare. Healthcare segment earnings were strong in 1H21 chalking in RM41.5m net profit, even higher than 1H91 levels (pre-Covid) of RM34.7m thanks to higher number of admissions and outpatient treatments at Sunway Medical Centre (SMC) and Sunway Medical Centre Velocity (SMCV). Operation theatre utilisation rate is around 50-60% for SMC and 40-50% for SMCV. In terms of occupancy rate, as at end of 2Q21, SMC was close to 60% and SMCV close to 40% (vs slightly higher occupancy of 40-50% in SMCV at end of 1Q21; no significant change in the occupancy rate for SMC). Management shared that the good performance in its healthcare segment was partially contributed by Covid-19 patients where SMC has allocated about 10% of licensed beds as Covid-19 beds while SMCV allocated about 20% (SMC has 616 licensed beds and SMCV has 118). Expansion plans for 2022 openings (in Sunway City and Seberang Jaya) remain on track for completion although there will be a slight delay due to lockdown.

Property development. We gathered that July and August property sales were impacted due to weak sentiment from the high number of cases and protracted lockdown period. Nevertheless, management is confident of achieving FY21 sales target of RM2.2bn evidenced by strong sales of RM1.64bn in 1HFY21 (74.5% of target). Recent take up rate remained resilient with Sunway Belfield Tower A sales registering a 87% take up rate and the newly launch Tower B recorded a strong take up rate of 65% when it was only launched in March 2021. For Singapore projects, Parc Canberra registered almost 100% take up rate while Parc Central at 85% and Ki Residences at 58% take up. Management is targeting to launch Sunway ARTESSA, Wangsa Maju in 3Q21 catered for mid-range market while the rest of the launches (Sunway D' Hills in Kota Damansara, Sunway Velocity TWO (Tower D) and Sunway Gardens Phase 3A in Tianjin, China) are targeted for 4Q21 launch.

Construction. We understand there will be slight delay on completion of projects due to halt in operation during lockdown period. Nevertheless, management is confident of getting extension of time from its client as they did for the earlier MCO1.0. There was some temporary shortage of building materials during MCO3.0 but it has since recovered. Although supply of foreign labour has constricted on the back international border closure, labour supply remains manageable at this juncture. Overall, prospects remain resilient underpinning by outstanding order book of RM4.8bn with a cover ratio of 3.1x.

Property investment. The recent reopening measures by the government for fully vaccinated consumers, including dine-ins and 11 types of business are expected to boost stronger retail activities. As of 16 Aug, c.80% of the group’s total number of tenants are operating while the remaining tenants are in the process to secure approval from MITI and/or achieve the minimum vaccination rates for their employees. Management is working closely with the tenants to work on flexibility in their tenancy terms and tenures with tenant retention as a priority. The group does not rule out selective rental assistance in the coming months as retail sales remain weak. In term of rental reversion, we understand that it likely in the negative single -digit levels due to the challenging retail landscape. However, management remain confident of achieving profit for this segment once inter-state travel is allowed and its theme parks can reopen as overall net contribution for theme parks are close to RM100m (1H21 losses of property investment segment: -RM16.9m).

Vaccination rate. To-date, the group has managed to get 95% of its workforce fully vaccinated. Meanwhile, 68% the group’s construction workers are fully vaccinated and almost 100% already had their first dose. Management is targeting to achieve fully vaccination level by end of 3Q21, hence, is well positioned to capitalise on the anticipated strong recovery in the later part of this year.

Forecast. Maintain We maintain our BUY call with an unchanged TP of RM2.58 based on SOP-derived valuation. Sunway remains our top pick given its well-integrated property, construction and building material operations. With its wide ranging business exposure, the group is a good proxy to the eventual economic recovery. Meanwhile, its efforts to expedite expansion of healthcare with its new strategic partner of GIC, will culminate in the separate listing of healthcare unit to help unlock value in the group.

Source: Hong Leong Investment Bank Research - 6 Sept 2021