We believe Sunway is poised for a better recovery in FY22 riding on the economic recovery and tourism theme. We reckon demand for its leisure & hospitality and healthcare segment will rebound strongly as Malaysia move s into an endemic phase as well as reopening of international borders. Other business segments also expected to remain resilient given its well-integrated business exposure. We maintain our forecast and BUY call with an unchanged SOP-based TP of RM2.58.

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

Healthcare. 4Q21 saw strong recovery in hospital activities with higher occupancy QoQ from more reopening of economy. In 4Q21, Sunway Medical Center (SMC) City’s occupancy registered c.70% (3Q21: low 60%) while Sunway Medical Center Velocity’s (SMCV) registered about 60-65% (3Q21: low 60%). Apart from that, we understand that SMCV has turnaround during 4Q21 period, registering a maiden profit of RM0.5m, which lowered the YTD operating losses to -RM8.6m (from -RM32.0m in FY20). Moving forward, this segment will benefit from healthcare tourism when international borders reopen. Completion of SMC Seberang Jaya is also on track and is slated to open by 4Q22 with potential bed capacity of c.333 beds.

Property development. Sunway is setting a conservative sales target of RM2.2bn (- 15.7% YoY) supported by RM2.3bn GDV launches target for FY22. About 59% of launches will be in Malaysia with Jernih Residence Kajang (GDV RM281m), Sunway Bukit Jalil (RM275m) and Sunway Alishan Cheras (RM261m) scheduled to be launched in 1H22. We believe these mid-range high rise projects will likely be well received mirroring the success of Sunway Bellfied KL whereby tower A (launched in Jan 2021) sales registered a 98% take up rate and Tower B (launched in Mar 2021) came in at 93%. Meanwhile, Singapore projects also showed a strong take up rate (Parc Canberra: 100%; Ki Residence: 80%; Parc Central: 99%). With regards to the high building materials costs, we gathered that the impact will be 2-3% increase to overall property development cost in which management can compensate with other cost saving initiatives to retain profit margin.

Property investment. We gathered that footfall and turnover sales for malls in 4Q were robust, registering above pre-pandemic levels likely from “revenge spending” and holidays shopping spree after Covid-19 restrictions were eased. Theme park operation also showed a profitable quarter while losses from hospitality segment were narrowed. Overall, we believe the segment is poised for strong recovery riding on the tourism theme when international borders reopen.

Construction. The segment also saw a strong showing in 4Q21 driven by better margin from completion of certain projects. We gathered that the better performance will spill over in FY22 as some of the projects are due for completion.

Trading & manufacturing. FY21’s trading and manufacturing segment recorded an increase in revenue of 3.4% and PBT of 54.7% mainly due to higher sales from the local market and better operating margins which more than offset the lower performance from China due to strict power-rationing measures. We reckon the segment will be well placed to benefit from the rollout of government spending on infrastructure going forward.

Forecast. Unchanged

We maintain our BUY call with an unchanged TP of RM2.58 based on SOP-derived valuation pegged to FY22 horizon. 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 economic recovery. Meanwhile, its efforts to expedite expansion of healthcare with its new strategic partner GIC, will culminate in the separate listing of healthcare unit to help unlock value in the group.

Source: Hong Leong Investment Bank Research - 7 Mar 2022