1QFY21 came below expectations due to our overly optimistic recovery projections for its hospitality division and weaker-than-expected construction contributions. That said, sales of RM1.16b came above due to strong demand from Singapore. Reduce FY21E/FY22E earnings estimates by 58%/29% post results. That said, we increase TP to RM1.77 (from RM1.55) after revaluing its healthcare segment on EV/EBITDA (from PER) methodology and rolling valuation base year forward. Maintain MP.

Below expectations. 1QFY21 CNP of RM58m (-76% QoQ; -7% YoY) came below our and consensus expectations at 12% and 11% of full- year estimates, respectively. The disappointment stemmed from: (i) our overly optimistic recovery projections for its hospitality division and (ii) weaker-than-expected construction (Suncon) contributions. No dividends as expected which are usually declared bi-annually in the second and fourth quarter of the year.

That said, 1QFY21 gross property sales of RM1.16b (effective RM1.13b) is trending way above our/management’s gross target of RM1.6b (effective RM1.4b) for the year due to stronger-than-expected take-up from its three ongoing Singapore projects namely: (i) Ki Residence – launched Dec 2020 with GDV of RM1b, (ii) Parc Central – launched Jan 2021 with GDV of RM910m, and (iii) Parc Canberra – launched Feb 2020 with GDV of RM560m. These Singaporean projects contributed RM0.865b (or 75%) of 1QFY21 total sales of RM1.16b. That said, due to MFRS15 accounting standards, we note that earnings contributions will be on a lump-sum basis in FY23 (for Parc Canberra) and FY25 (for Ki and Parc Central) upon project completion. Consequent to this, we increase our FY21 target gross sales to RM1.9b (effective RM1.7b). Current unbilled sales of RM3.3b (effective RM2.8b) provide c.4x cover.

Highlights. 1QFY21 CNP of RM58m dipped 76% QoQ mainly because it came off a high base from 4QFY20 which was propped up by bumper JV contributions from developments in China and Singapore which were recognised upon completion. To a lesser extent, MCO 2.0 also affected productivity in 1QFY21 as compared to 4QFY20 when it was running at almost full capacity. 1QFY21 CNP declined 7% YoY mainly due to weaker hospitality division.

A slower recovery ahead. With stricter lockdowns in place to contain the Covid-19 spread, we anticipate all Sunway’s divisions to take a longer recovery trajectory path ahead. Its hospitality division parked under the property investment arm would be the worst-hit division with international/interstate borders still closed. We are now projecting gradual recovery to start from FY22 instead of 2H 2021.

Reorganisation of healthcare assets could be a precursor towards a stake sale soon. In early May, Sunway reorganised their healthcare assets to be parked under a single entity – Sunway Healthcare Holdings S/B. We believe the move is a precursor towards a stake sale in which Maybank was appointed back in Sep 2020 to assist with a 20- 25% stake sale. In light of this deal which would expedite the expansion of its healthcare unit, we revalue its healthcare unit to 25x EV/EBITDA (from 37x PER) in line with industry practice. Our ascribed 25x EV/EBITDA is higher compared to listed peers (IHH, KPJ) given Sunway Healthcare being in an initial growth phase.

Revise FY21E earnings lower by 58%/29% after factoring for: (i) the lower earnings for Suncon and Sunreit, and (ii) a loss in its property investment division arising from the slower-than-anticipated recovery. Maintain MP with higher SoP-derived TP of RM1.77 (from RM1.55) after rolling valuation base year forward to FY22 and revaluing its healthcare unit with EV/EBITDA (from PER).

Source: Kenanga Research - 27 May 2021