Sunway recorded 1H22 core PATAMI of RM270m, which is within our but above consensus expectations. The group saw broad based improvement across most of its business segments following a recovery in economic activities. Maintain BUY an unchanged TP of RM2.65 based on SOP-derived valuation. We continue to like Sunway as its business segments are poised to benefit from the economic recovery and border reopening. Sunway remains our top pick given its well-integrated property, construction and building material operations.

Within ours but above consensus. Sunway reported 2Q22 core PATAMI of RM142.4m (+12% QoQ; +1.2x YoY), bringing 1H22’s sum to RM270m (+1.5x). The results were within our (53.8%) but above consensus (57.1%) expectations. 1H22 core PATAMI was arrived at after including payment to ICPS holders of RM25.7m and excluding net EIs of RM13.4m mainly from PPE disposal gain (RM7m), investment disposal gain (RM26.6m) and forex loss (-RM27.3m).

Dividend. Declared first interim dividend of 2 sen, ex-date: 14 Sept 2022 (2Q21: 1 sen). 1H22: 2 sen (1H21: 1 sen). The group also declared 1H22 preferential dividend of 2.625 sen, ex-date: 14 Sept 2022.

QoQ. Revenue increased by +15% mainly contributed by all business segments except construction. Construction declined by -14% as there were higher recognition of projects nearing completion in the immediate preceding quarter. Core PATAMI increased by a lower magnitude of +12% due to (i) RM25.7m payment to ICPS holder; and (ii) lower recognition from one of Singapore’s private condo which has a better margin.

YoY/YTD. Revenue increased by +67% YoY and +48% YTD contributed by an improvement in all business segments following the reopening of the economy (vs. MCO3.0 in June SPLY). Consequently, core PATAMI increased by +1.2x YoY and 1.5x YTD.

Property development. Sunway recorded new sales of RM407m (+1.8% QoQ; -5.3% YoY), bringing 1H22’s sum to RM807m (-48.3% YoY), representing 36.7% of its FY22 sales target. There were no launches in 2Q22, while 1H22 launch is RM281m, representing 14.1% of its full year launch target of RM2bn. Unbilled sales stand at RM3.65bn (-1.6% QoQ from RM3.71bn in 1Q22), representing a strong cover ratio of 5.8x of its FY21 property development revenue.

Property investment. The segment continues to see improvement sequentially with PBT +19% QoQ following the recovery in footfall following the country’s progression to endemicity. As footfall and tenant sales have returned to pre-pandemic levels for its retail segment, we expect its momentum to remain resilient. Also, the rental rebate is expected to trend lower amidst improvement in tenant sales. Similarly, we foresee hotel segment to continue delivering healthy improvement arising from better occupancy and average room rates. The gradual reopening of Sunway Resort Hotel is also timely to capitalize on the strong appetite for domestic travel and the visitation of foreign tourist as international borders have reopened.

Construction. SunCon‘s latest outstanding orderbook stands at RM4.2bn translating into a decent 2.5x cover. Going forward, SunCon is poised to benefit from: (i) MRT3 jobs, (ii) sizable factory/data centre job and (iii) RM500m worth of in-house jobs. ICPH, due to commence operations in 2H22 could leverage on strong backend loaded BTO launches.

Healthcare. Healthcare continues to show strong improvement with 2Q22 reported share of net profit of RM35.3m (+25% QoQ; +28% YoY) due to higher number of patients at both SMC and SMCV. The segment should continue to improve in 2H22 on account of pent-up demand from (i) foreign patients with borders reopening; and (ii) recovering patient footfalls from delayed elective procedures. Its strong pricing power also allows the segment to weather through the current inflationary period.

Forecast. Unchanged.

Maintain BUY with an unchanged TP of RM2.65 based on SOP-derived valuation. The group has multi levers of growth, particularly with its fast expanding crown jewel, healthcare segment. Its efforts to expedite the expansion of its healthcare segment with its new strategic partner GIC, will culminate in the separate listing of healthcare unit to help unlock value in the group. With the economy recovering and borders reopening, the group is ready to harness the full potential of its business as all of its business segments are expected to benefit from it. Sunway remains our top pick given its well-integrated property, construction and building material operations.

Source: Hong Leong Investment Bank Research - 25 Aug 2022