This article first appeared in The Edge Financial Daily on April 13, 2018
Sunway Bhd
(April 12, RM1.62)
Upgrade to buy with a lower target price (TP) of RM1.82: We recently met with management for an update. This year, Sunway Bhd is to focus on launching projects on the land parcels it bought last year while expanding its healthcare wing. The steady growth in its other divisions should help offset the potential weakness in the property development business and, hence, overall earnings should see a decent growth in financial year 2018 (FY18).
Sunway has approximately RM2 billion worth of new projects slated for launch, mostly in the second half. Among the sizeable ones are Rivercove Residences in Singapore, Sunway GEO Lake in South Quay, and the maiden launches of Sunway Velocity TWO and Sunway Wangsa Maju. The latter two are mainly focusing on the affordable segment, whereby the per square feet (psf) pricing would be about RM650 to RM800 psf, with absolute pricing of less than RM1 million for most units. Given the locations of these projects, we believe Sunway would be able to achieve its 2018 sales target of RM1.3 billion (2017: RM1.2 billion).
Sunway is to spend about RM1 billion over the next five years to set up four new medical centres in Sunway Velocity, Seberang Jaya, Kota Damansara and Ipoh. These four new hospitals are to add another 870 beds to the existing 618 beds at Sunway Medical Centre and Medical Centre 3. Among them, Sunway Medical Centre Velocity is targeted to open in the first quarter of 2019. Although we expect some start-up losses in the first year of operations, the expansion in the healthcare division is, nonetheless, attractive for long-term growth. It could potentially be listed at premium valuations too once it is carved out. Sunway’s healthcare wing recorded RM45 million in profit after tax and minority interests in FY17.
Although investors can opt for direct exposure via Sunway Construction (SunCon), given its 54.4% equity stake, the group still benefits from the new order book that can be potentially secured by its subsidiary. We note that although SunCon did not win the tender for the Kuala Lumpur-Singapore High Speed Rail (HSR) project delivery partner role, it could still bid for the HSR work packages and those of the mass rapid transit Line 3 as well in future. The potential rerating of SunCon could spill over to Sunway to a certain extent.
We have a “buy” (from “neutral”) rating on Sunway with a new TP of RM1.82 (from RM4.33, 15% upside) based on a 40% discount to revalued net asset valuation for the property wing and 10% holding company discount. We expect stable earnings growth over the next two years, while strategic expansion for the healthcare segment should drive long-term value creation. Its share price should also be supported by sustainable dividend yields of 3% to 4%. Weaker-than-expected market conditions are a key risk. — RHB Research, April 12