We adjust down our FY17-19E EPS by 57-60% and TP to RM2.05 from RM4.90 (based on the same 20% discount to RNAV) to account for; i) the change in associate Sunway REIT’s earnings and fair value (Sunway REIT: More than just rental reversion initiation of coverage report on 6 October 2017), ii) the completed 4-for-3 bonus issue exercise and the fully-diluted impact of the 3 free warrants issued for every 10 shares, and iii) cash adjustments from land-banking exercises, asset disposal and increasing stakes in joint ventures (JV). We reiterate our BUY call on Sunway given the good long-term prospects of its services business and strategic land bank expansion.

Bonus Issue and Free Warrants

Sunway’s issue of 4 bonus shares for every 3 existing shares and 3 free warrants for every 10 shares has enlarged its share capital to 4.8bn, resulting in 2.8bn new ordinary shares and 630m new warrants being listed on 6 October 2017. The exercise price of the free warrants is fixed at RM1.86. The value-enhanced warrants are a first of its kind with a fixed annual step-down mechanism of RM0.07 to encourage warrant conversion over the 7-year exercise period. The exercise price in 2018-2023 will be fixed at RM1.79, RM1.72, RM1.65, RM1.58, RM1.51 and RM1.44 respectively.

Healthcare Services Expansion

Sunway will raise cash of up to approximately RM1bn from the exercise of warrants assuming full conversion by Year 7. Although there is no immediate plan on the utilization of the proceeds, we expect most of it will be for expansion. Sunway plans to invest RM1bn in its healthcare services segment by building 5 new hospitals within the next 5 years with 2 hospitals in Sunway Penang and one each in Sunway Velocity Cheras, Sunway Damansara and Sunway Ipoh. It also plans to increase the total number of beds in Sunway Medical Centre Sunway City to 618 (+65.7% yoy) by end-FY17 and up to 1,000 beds over the next 2½ years. Sunway Medical Centre was awarded the runner-up prize for Medical Tourism Hospital 2017.

Valuation at a Discount to Peers

Unbilled property sales of RM1.2bn and a record-high construction order book of RM6.5bn (including the recently secured LRT Line 3 package for RM2.17bn) will likely underpin our projected core EPS growth 22% in FY18E. At the current FY18E PER of 13x, Sunway is trading at a discount to construction-property conglomerate peers Gamuda, IJM Corp, MRCB and WCT (PER range of 13-20x). We maintain our BUY call on Sunway with an adjusted TP of RM2.05, based on a 20% discount to RNAV.

Source: Affin Hwang Research - 13 Oct 2017