• Maintain BUY, with new MYR3.00 TP from MYR2.65, 35% upside and c.3% yield. We believe investors should start accumulating Sunway, not only because it is a Johor thematic play, but also in view of the upcoming listing of Sunway Healthcare Group (SHG). The strong performance of all the hospitals may help to accelerate the timing of the listing – SHG’s estimated worth is MYR9bn. Similar to the listing of Sunway Construction (SCGB MK, BUY, TP: MYR2.22) eight years ago, investors are expected to be rewarded via this value-unlocking exercise.

• We revise SHG’s FY24 EBITDA forecast up by 90%. Performance of newer hospitals, especially Sunway Medical Centre (SMC) Seberang Jaya is better than expected. The hospital’s EBITDA has already turned positive since 2Q23 considering that it only opened in Nov 2022. We expect the hospital to start turning profitable at the PBT level in 2H24. Given the expansion pipeline, SHG is likely to have 2,500 beds by 2027 from the current 1,100 beds. Under the shareholders’ agreement with Singapore's sovereign wealth fund GIC Pte Ltd, the IPO for SHG has to be completed by Oct 2027. We expect the listing to happen sooner.

• SHG may potentially be worth MYR9bn, at 20x EV/EBITDA. Benchmarking against the valuation of the disposal of Ramsay Sime Darby Healthcare in November last year, SHG’s EV may potentially be worth MYR9bn based on the same 20.1x EV/EBITDA multiple and our FY24 EBITDA forecast of MYR450m. Upon the potential listing in FY25F-26F, SHG may have a market cap of MYR10-12bn (Sunway has an 84% stake in SHG). Sunway’s market cap is now only at MYR12bn.

• Time to position. We advise investors to start positioning as Sunway would offer a cheaper entry to the listing of SHG. Investors who have been following Sunway would remember how the group was re-rated before the listing of SCGB in 2014-2015, and how they were rewarded from the demerger. Recall, during the listing of SCGB, Sunway’s shareholders were entitled to 1-for-10 distribution in specie of free SCGB shares and post listing, shareholders also received a 26 sen special dividend. We expect Sunway’s shareholders to be rewarded similarly via the value-unlocking exercise.

• Also a strategic Johor play. Stripping off the valuations of all the listing entities as well as the estimated value for SHG, Sunway’s other divisions are only worth MYR1.8bn. This is significantly undervalued, as the investment properties not currently owned by the REIT already have a total book value of MYR2.6bn. Note, Sunway owns strategic landbank such as the parcel at Velocity, South Quay, as well as 1,770 acres in Iskandar Malaysia just off the Tuas link, which, in our view is a jewel given all the catalytic developments and the upcoming establishment of JohorSingapore special economic zone.

Source: RHB Securities Research - 8 Jan 2024