We favour Sunway as an investment proxy for domestic economic expansion and the re-ignition of Iskandar Malaysia. Additionally, we recognise substantial value within the thriving Sunway healthcare division. We revise our FY24-25 earnings forecasts higher by 1-3% to factor in the stronger-than-expected earnings from the healthcare division. Maintain Buy on Sunway with a higher TP of RM2.80, based on SOP valuation.

A Diversified Conglomerate Benefiting From Domestic Economy Expansion

We like Sunway’s diverse business portfolio, strategically positioning investors to capitalise on economic growth across sectors. Anticipating robust economic expansion driven by strong domestic demand and a more robust labour market, we expect a surge in demand for housing and commercial spaces. In our opinion, the eventual rollout of key infrastructure projects further contributes to a favourable landscape for Sunway's property development and construction divisions.

Furthermore, the group's property investments division (including its 40.9%- owned Sunway REIT) is poised to gain from rising rental rates and property values, which are driven by increased retail spending and foot traffic. Concurrently, the group's leisure, hotel, and healthcare divisions are positioned to benefit from the rebound of inbound leisure tourism and medical tourism.

We anticipate the group to surpass its FY23 sales target of RM2.3bn, given that 9M23 sales already make up 91% of the target. With unbilled sales totalling RM4.6bn and an outstanding construction order book of RM3.7bn (external jobs only), Sunway maintains robust earnings visibility for the next 3-4 years.

Proxy to Iskandar Malaysia Re-ignition

In the coming years, we expect the completion of the Rapid Transit System rail link in 2026 and the establishment of the Johor-Singapore Special Economic Zone (JS-SEZ) to bode positively for Sunway City Iskandar Puteri. This flagship township development is expected to thrive due to its strategic positioning between Puteri Harbour and the Second Link to Singapore. Being the secondlargest developer in Iskandar Malaysia by GDV among listed developers, Sunway emerges as an appealing investment choice for those seeking exposure to the potential upswing in Iskandar Malaysia.

The positive sentiment is already evident in the strong sales performance of Sunway Aviana, a landed development within Sunway City Iskandar Puteri, launched in October 2023, achieving an impressive 57% take-up rate within a month of launch. Additionally, our optimism extends to Sunway's joint venture with Equalbase, a Singapore-based real estate group specialising in sustainable commercial and industrial logistics facilities. Together, they aim to develop Equalbase Sunway 103°, an integrated sustainable logistics facility spanning 135 acres with a GDV of RM8bn over 10 years. With the JS-SEZ expected to enhance the business ecosystems of both Iskandar Malaysia and Singapore, we foresee strong demand for the industrial spaces within Equalbase Sunway 103°. Phase 1, offering industrial space with a total gross floor area of approximately 200,000 sqm (GDV: RM 1bn), is targeted for completion in 2025.

Rapid Expansion in Healthcare Division

Sunway Healthcare, a leading Malaysian private healthcare group, has expanded to three hospitals and three Ambulatory Care Centres since 1999. With 1,121 beds, 347 consultation suites, and 30 operating theatres, including new centres like Sunway Medical Centre Penang, expansions continue across all sites. The upcoming openings of Sunway Medical Centre Damansara in 2024 and Sunway Medical Centre Ipoh in 2025 further exemplify this growth. Looking ahead, Sunway Healthcare targets establishing additional hospital facilities in Kota Bahru Kelantan, Penang Island, and Iskandar Puteri Johor, aiming for a total capacity of 3,000 beds by 2030.

Sunway Healthcare's new hospitals have exceeded expectations in their performance. Sunway Medical Centre Velocity achieved Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) breakeven within a year of commencing operations in September 2019. Remarkably, Sunway Medical Centre Penang demonstrated even stronger performance, achieving EBITDA breakeven in 2Q23. This accomplishment is particularly noteworthy considering it only commenced operations in November 2022, a significantly shorter timeframe compared to the typical gestation period for new hospitals, which often spans 3 to 4 years.

Given the robust financial performance of the healthcare business, we anticipate that the management will likely proceed with the healthcare arm's listing before the agreed date of 2027 with its strategic partner, GIC. Based on our projected CY24 EBITDA of RM455mn, we estimate that Sunway Healthcare could potentially command an equity value of RM9.1bn, utilizing the 20.1x EV/EBITDA benchmark established by Columbia Asia's acquisition of Ramsay Sime Darby Health Care. That said, Sunway's 84% stake in Sunway Healthcare translates to RM7.7bn, equivalent to 60% of Sunway Bhd’s present market capitalisation. In light of these considerations, we are excited about the prospects of this valueunlocking exercise.

Impact

We revise our FY24 & FY25 earnings forecasts higher by 1-3%, largely to factor in stronger-than-expected performance from the healthcare division.

Valuation

We arrive at a new SOP-derived TP of RM2.80/share (previously RM2.40/share). This incorporates an increased P/E multiple of 16x (previously 14x) for the property development and property investment segments (excluding Sunway REIT) to reflect the upbeat property sector sentiment. We value SunCon and Sunway REIT based on our TPs. As for the healthcare division, we peg the valuation at 20x CY24 EV/EBITDA. Meanwhile, the trading & manufacturing and quarry segments are valued at 10x CY24 earnings. Maintain Buy

Source: TA Research - 12 Jan 2024