SUNWAY's 9MFY24 results met expectations with earnings growth seen across all business segments. We reckon SUNWAY will continue to be in the limelight following the heightened sentiment in the property development space as well as the pending spin-off of its healthcare unit. Meanwhile, we take this opportunity to increase our TP to RM3.35 (from RM2.66) to realign with our higher TPs ascribed to SUNCON and SUNREIT while reviewing our valuations and assumptions for its healthcare segment. Maintain our UNDERPERFORM call as current valuations still appear pricey.

SUNWAY's 9MFY24 core net profit of RM671.4m came within our expectations, making up 78% of our full-year forecast. This is also likely within consensus at 82% of full-year estimate, given a lumpy profit recognition of RM124m for Parc Central Residence, Singapore, possibly indicating a softer 4QFY24 reporting.

YoY, its 9MFY24 revenue rose 18%, driven largely by property development (+26%) which was also supported by the abovementioned Singapore project which was completed in July 2024. The construction (+18%) and property investment (+14%) segments also benefited from accelerated progress in data centre projects, and higher occupancy rates and visitors at its theme parks. Its core net profit rose by 66% from better operating performance across all business segments.

QoQ, its 2QFY24 revenue increased 29% from the above-mentioned reasons. This led to its core net profit doubling to RM376.1m. Excluding the lumpy property development recognition for Parc Central Residence, core earnings would have gained 45% on supportive construction and healthcare contributions.

Outlook. Sunway maintains a positive outlook across its business segments, with the property division focusing on new launches in established townships. As of 9MFY24, the group has achieved 70% of its total launch target and 71% of its RM2.1b sales target, with 56% of sales originating from the Klang Valley.

Its construction unit has revised its CY24 order book replenishment target to RM4.0b - RM5.0b (from RM2.5b - RM3.0b) and is anticipating more public sector projects and data centre development. Its healthcare unit is poised to benefit from medical tourism and two new hospitals under its stable, i.e. Sunway Medical Centre Damansara and Sunway Medical Centre Ipoh are on track for opening in 4QFY24 and 1QFY25, respectively.

Forecasts. We slightly tweak our FY24F earnings by 1% from model housekeeping but raise our FY25F earnings by 5% following updates to our revised earnings for SUNCON and the healthcare segment.

Valuations. We increase our SoP-TP of RM3.35 (from RM2.66) as we update our valuations for: (i) SUNREIT's revised TP of RM2.01, (ii) SUNCON's revised TP of RM4.52, and (iii) raising our healthcare valuations to 20x EV/EBITDA with a higher EBITDA assumption of RM615m (from RM430m) for FY25F, premised on higher expectations following its strong traction reported. We believe a 20x valuation is reasonable, in line with previous transactions with valuations ranging up to 25x forward EV/EBITDA.

Meanwhile we maintain our 55% discount to RNAV for SUNWAY's property development segment (in line with industry peers) (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We like SUNWAY for: (i) having an eye for good land parcels, enabling it to execute quick turnaround for its property projects, (ii) its growing private healthy business backed by a pipeline of new medical centres within brownfield townships, (iii) a diversified range of investment assets that provides recurring incomes, and (iv) its well-established Sunway brand. However, its valuations appear excessive following the run-up in its share prices. A strong re-rating could be a higher-than-expected listing valuation for its healthcare unit. Maintain UNDERPERFORM.

Giving some benefit for higher value. Amid the recent run up in share price, we opine that it is driven by: (i) better sentiment in property developers, and (ii) higher expectations for Sunway Healthcare.

In an attempt to mirror market sentiment, we reckon that: (i) lowering our discount to property RNAV by every 5% (from 55%) would add RM0.07/share; while (ii) raising our EV/EBITDA multiple by 5x would add another RM0.44/share to our TP, respectively.

Assuming a refreshed discount to RNAV of 30% to property development and EV/EBITDA of 20x to our healthcare segment, we would derive a TP of RM3.70, which is still heavily discounted from current price levels.

Risks to our call include: (i) a strong pick-up in the property, hospitality, and MICE sectors, (ii) a decline in mortgage rates boosting affordability, and (iii) improved spending confidence, prompting consumers to buy big-ticket items including properties.

Source: Kenanga Research - 27 Nov 2024