We came back from SUNWAY’s briefing yesterday feeling positive with its long-term plan in expanding its medical division coupled with its move to reward shareholders with the announcement of a bonus issue (4 for 3) and free warrants (3 for 10) exercise. While we maintain MARKET PERFORM due to its unexciting sales trajectory, we raised on our SoP-driven Cum/Ex-TP to RM3.87/RM1.66 after factoring in the medical division.

Reward time! Yesterday, we attended an analysts’ briefing chaired by Tan Sri Dato' Seri Dr. Jeffrey Cheah in relation to its proposed bonus issue (4 bonus for every 3 shares) and free warrants (3 warrants for every 10 shares) to reward shareholders, and also the objective behind their reclassification move into trading/services from its previous classification as a property company.

Growing its medical team. The main highlight of the briefing is SUNWAY’s aspiration to be one of the top leading medical service providers in the region which justifies their reclassification move into trading/service sector. In order to grow its medical division, they budgeted for a 5-year CAPEX plan of RM1.0b for the expansion of its hospitals across the country. In the immediate term, we would be expecting SunMed Phase 3 with a capacity of 250 beds to be operational by year-end, while its medical building in Sunway Velocity with a capacity of 240 beds to be ready by end of 2018.

Sustainable development. We laud management’s move in the reclassification which shows their determination and focus in the trading/service sector, especially in the healthcare business where management are already promoting medical tourism aggressively as a cheaper alternative to our neighbouring country i.e. Singapore but at the similar medical care standards. We believe that growing their medical division would provide them a sustainable income stream in the future, which would further mitigate their risk in the property and construction business which are highly cyclical. Furthermore, it is a business less prone to disruption as patients still required to seek medical treatment in hospital, especially chronic diseases unlike shopping malls, which runs the risk of declining footfalls due to online disruption.

Outlook. We remain confident with SUNWAY’s ability in delivering a sturdy performance for the year premised on its strong unbilled sales of RM1.4b with 2-year visibility, a robust outstanding order book of RM4.6b that provides 2-3 year visibility and other divisions that has been generating decent growth over the years. However, we are keeping a close track on its sales underpinned by its RM2.0b new launches in 2H17, as its 1Q17 sales of RM142.0m are still below our and management’s target of RM1.1b. In five years’ time, we expect management to consider the option of spinning off its medical division.

Earnings unchanged. Post briefing, there are no changes to our FY17-18E core earnings.

MARKET PERFORM. While we are maintaining our MARKET PERFORM call on SUNWAY due to its unexciting sales trajectory, we raised our SoP-driven Cum/Ex-TP to RM3.87/RM1.66 (previously, Cum/Ex-TP: RM3.50/RM1.50) after factoring in its medical division after obtaining better clarity from management on its medical business direction and contribution.

Downside risks include: Weaker-than-expected property sales and construction replenishment, higher-than-expected sales and admin costs, negative real estate policies, and tighter lending environment.

Source: Kenanga Research - 15 Jun 2017