Sunway has brought in GIC Private Limited (GIC) as a strategic investor for their healthcare business in order to expedite the construction of their upcoming hospitals while maintaining a healthy gearing. We are positive as the EV valuations fetched by this deal is 22% higher than what we had ascribed – a strong testament for Sunway Healthcare’s deep value. Furthermore, the deal also provides investors a clear monetisation timeline via a targeted IPO. Consequently, we upgrade TP to RM1.95 and maintain MP.

GIC is injecting RM750m for 16% stake in Sunway Healthcare. Sunway announced that GIC (sovereign wealth fund of Singapore) will be injecting RM750m into Sunway Healthcare in exchange for a 16% equity stake. This equity injection will be done in 5 tranches in a span of 3.5 years (42 months) where the last tranche in expected to be injected by 4Q 2024. In this deal, GIC essentially values Sunway Healthcare at an EV (Enterprise Value) of RM4.073b implying a trailing 12-month EV/EBITDA of 31.3x.

Post deal, Sunway Healthcare will no longer be a subsidiary of Sunway but instead a Joint Controlled Entity (JCE) alongside GIC. This deal will also net Sunway an effective gain of RM2.3b (which we consider non- core) as they revalue their Healthcare portfolio.

Caveat. For their RM750m injection, GIC will require 12.5% IRR per

annum. In order to achieve this, Sunway Healthcare needs to go for an IPO listing by the 8th year upon the first set of conditions precedents being met to provide GIC the option to cash out their investment. (refer overleaf for further details)

Overall, we are positive for three key reasons. Firstly, the EV valuations fetched in this deal is 22% higher than our ascribed EV of RM3.3b based on 25x FY22E projections. Secondly, the cash injection will help Sunway Healthcare expedite growth of its upcoming hospitals while maintaining a healthy net gearing of <0.5x. In the next 6 - 8 years prior to IPO, Sunway Healthcare is anticipated to incur a capex of c.RM2.5b to increase its existing bed count from 740 to c.3,000. Last but not least, the deal will also provide the investment fraternity a clear timeline for an eventual IPO to monetise the assets.

What kind of valuations can we expect upon IPO? Based on GIC’s required IRR of 12.5% upon IPO listing on the 31st Jan 2028 (or up to 30th Jun 2029 being the latest), we work out that the minimum market cap required for Sunway Healthcare to achieve is between RM7.3b to RM8.6b. Basically, the longer it takes for Sunway Healthcare to be listed, the higher market cap is required by GIC to meet their 12.5% IRR return requirement. In the event GIC fails to get such valuations out from the IPO listing, Sunway will have to reimburse the shortfall.

We think RM7.3b market cap is achievable. Assuming Sunway Healthcare fetches an EBITDA multiple of 18x upon listing (straddling between IHH’s 19x and KPJ’s 13x), it will require an EBITDA of c.RM450m/annum to hit the RM7.3b market cap target (or EV of RM8.0b as we assumed net debt of RM0.7b). With their current bed count of 740 already raking c.RM130m EBITDA/annum, we think the targeted EBITDA is achievable as extrapolating to 3,000 beds will provide an EBITDA of RM530m/annum.

Post deal, keep FY21/22E earnings unchanged as income dilution from the stake sale is marginal. Maintain MP with higher SoP- derived TP of RM1.95 (from RM1.77) after re-evaluating their healthcare business to 30x EV/EBITDA (from 25x). MP call maintained as we feel that current share price have largely priced in the positives.

Source: Kenanga Research - 24 Jun 2021