1QFY20 was marred by the Covid-19 effects as CNP stood at RM66.4m (-49% YoY), which represents just 10%/9% of our/consensus full-year expectation. Particularly hit hard during the quarter were the hospitality & leisure (which is parked under property investments), construction and healthcare segments. With 2QFY20 expected to be even weaker QoQ, this has prompted us to cut our FY20E/FY21E net profit by 51%/5%. With earnings recovery expected in FY21, we maintain our MP call with a higher TP of RM1.63 (based on adjusted PBV of 0.95x). Below expectations. 1QFY20 saw the effects of the Covid-19 pandemic, particularly after the implementation of the MCO (Movement Control Order) on 18 March. This resulted in CNP of RM66.4m (-49% YoY/-57% QoQ), which missed our (at 10%) and consensus (at 9%) expectations with the Covid-19 impact being felt almost across the board.

Results’ highlights. By segmental reporting, the worst hit divisions were: (i) property investment with net profit contribution plunging to RM29.7m (-36% YoY/-61% QoQ), hit by the slump in the hospitality & leisure business and the absence of fair value gains from revaluation of investment properties which had previously lifted 4QFY19 earnings, (ii) construction which contributed net profit of RM11.2m (-39% YoY/-28% QoQ) following the MCO disruptions, and (iii) healthcare, which slipped into a net loss of RM4.5m (vs. net profits of RM15.2m in 1QFY19 and RM11.2m in 4QFY19) due to fewer number of admissions and outpatient treatments amid the MCO and start-up losses at Sunway Medical Centre Velocity (which commenced operation in Sep 2019 and posted an operating loss of RM11.9m in 1QFY20). Meanwhile, the property development segment fared relatively better with a net profit contribution of RM26.6m (+11% YoY/-73% QoQ) considering that 4QFY19 was lifted by a lumpy recognition from a property development in China.

Fund-raising plan. Separately, SUNWAY has proposed a rights issue of up to 1.11b ICPS (Irredeemable Convertible Preference Shares) at an issue price of RM1.00 each on the basis of one ICPS for every five existing shares held. These 5-year tenure ICPS – which will be listed on Bursa and come with a cumulative preferential dividend rate of 5.25% p.a. to be paid at the discretion of the company – will be mandatorily converted into new SUNWAY shares at a conversion price of RM1.00 via the surrendering of the ICPS (whereby 50% to be converted on Year 4 anniversary and the balance on maturity date). The maximum proceeds of RM1.11b will be utilised for debt repayment (RM733m), capex to build hospitals (RM200m) and property development & property investment expenditure (RM180m). On a proforma basis, its share base is expected to increase from 4.93b shares to 6.05b shares upon full conversion. We deem the ICPS offer to be attractive given the steep discount of 31.5% between the issue price and the theoretical ex rights price of RM1.46 per SUNWAY share.

Outlook. The Group raked in new property sales of RM522m (of which 79% came from Singapore) and secured new construction contracts of RM513m in 1QFY20. With unbilled property sales of RM2.6b and construction order-book of RM5.4b as of end-Mar 2020, earnings visibility remains intact. However, following the staggered re-opening of the economy starting from early May, 2QFY20 is expected to be sequentially weaker. Consequently, we have adjusted our FY20E and FY21E CNPs to RM316m (-51%) and RM670m (-5%), respectively.

Still MARKET PERFORM. We continue to like Sunway for its diversified earnings base, with the resiliency of its REIT and healthcare businesses providing stability to counter the cyclical nature of the property development and construction segments over the longer term. We have upped our TP from RM1.45 to RM1.63 after raising our PBV multiple to 0.95x based on mean valuation (to reflect a potential recovery from FY20 beaten down earnings).

Source: Kenanga Research - 28 May 2020