This article first appeared in The Edge Financial Daily on March 15, 2019

Sunway Bhd
(March 14, RM1.68)
Maintain buy with a target price (TP) of RM2.18: As of the first quarter of the financial year 2019 (1QFY19), the healthcare segment will be stripped off from the others segment and reported as a stand-alone segment instead. The segment recorded about RM60 million profit before tax (PBT) in financial year 2018 (FY18) and we believe this to be sustainable in FY19 as the increase in contributions from the established Sunway Medical Centre Phase 3 (SMC3) would be able to offset the start-up losses from Sunway Velocity Medical Centre (targeted to operate in mid-FY19). Sunway is able to turn its hospitals profitable within a year, largely attributed to talents from surrounding hospitals moving into its hospitals, attracting patients while boosting its reputation.

We can expect a large contribution arising from Phase 2 of the Sunway Gardens project in Tianjin, China to be recognised in FY19 (due to Malaysian Financial Reporting Standard 15 [MFRS 15]). Based on our estimates, the project may contribute approximately RM80 million to RM90 million to earnings. We gather that there is still room for further projects in Tianjin, with higher selling prices to be determined by authorities.

With regard to the Rivercove Residences (effective gross development value [GDV]: RM590 million), we estimate approximately RM80-90 million of earnings to be recognised in FY20 (due to MFRS 15). The project has already garnered a take-up rate of 99%.

We understand that the project in Brookvale, Clementi in Singapore is targeted to launch in the fourth quarter of 2019 (4Q19) with an estimated GDV of RM1 billion, based on 30% effective stake (earnings recognised progressively). With regard to the land in Canberra Link, also in Singapore, the project is targeted to launch in FY20, with an estimated GDV of over RM500 million, based on the effective stake of 35% (earnings recognised upon completion). As such, we remain positive on the property development segment as the sustained international contributions will continue to support division earnings.

This is largely attributed to the proximity to its international school which is expanding (attracting expatriates) and townhouse projects being not commonly found in Johor Baru

Sunway has over RM2 billion of matured investment properties which can be monetised via disposal to Sunway REIT. The asset unlocking exercises will only be carried out when needed, that is to fund capital expenditure and prevent breaching the threshold net gearing of 0.5 times.

We increase our forecasts for FY19/FY20 by 4.9/2.9% respectively, as we had previously underestimated the contributions from the overseas projects.

Despite the down cycle of both property development and construction sectors, we continue to like its resilient integrated real estate business model and earnings growth prospect with mature investment properties and underappreciated trading and healthcare businesses. — Hong Leong Investment Bank Research, March 14