Highlights

• Proposed bonus issue with sweetener of 4 bonus shares for 3 existing shares and 3 bonus warrants (with step-down exercise pricing mechanism) for 10 existing shares to improve liquidity and create value to shareholders. The bonus warrant is estimated to yield at least RM0.22 or 6% based on current share price.
• Misperception as a pure property counter. Sunway (P/E of 13x) should be rerated as a conglomerate and trade closer to Gamuda (P/E of 19x) and IJM (P/E of 20x) given its diversified income base from various business segments as well as the recent reclassification to trading & service from property sector.
• Hidden healthcare gem could potentially worth RM3.6bn. Sunway is focusing to grow its healthcare business and is targeting 5 new medical centres to house a total 1.7k beds within the next 5 years. The healthcare segment could potential worth RM1.8bn by FY18 (23% of current market capitalization) and double to RM3.6bn by 2021.
• Active capital management. Aside from the corporate exercise to reward shareholders and potential spin-off of healthcare segment as it grows bigger, the possible value unlocking exercise of its mature investment assets worth some RM1.4bn cannot be ruled out.
• Cheaper proxy for booming construction. Via its 54.4%- owned SunCon (BUY, TP: RM2.25), Sunway is the cheaper alternative to ride on the booming of construction sector given the ongoing mega infrastructure projects and catalytic development.
• HSR will be the longer term catalyst. Sunway, who owns 1,770 acres via its Sunway Iskandar township (GDV:RM30bn) is set to reap the benefits from The KL- Singapore High Speed Rail (HSR) in the longer run given the close proximity to the Iskandar Puteri station in Johor.

Risks

• Prolonged downturn in Johor?s property market;
• Execution risk.

Forecasts

• We incorporate latest financial data and fine-tune our model and resulting 0.5% and 0.3% increases in our FY17 and FY18 bottom lines.

Rating

BUY ↔ , TP: RM4.97 ↑

• Sunway should be rerated and compared to its closest peers, Gamuda and IJM. Its active capital management will continue to reward shareholders with its deeply valued assets and growing healthcare business which are currently being ignored by most investors.

Valuation

• We raise our TP from RM3.86 to RM4.97 (with 10% holding discount) after we revisit the SOP valuation for respective business segments as depicted in Figure #10.

Source: Hong Leong Investment Bank Research - 15 Jun 2017