Sunway Bhd to invest RM1b in five new hospitals

Sunway Bhd (Oct 13, RM1.72)
Reiterate buy call with an adjusted target price (TP) of RM2.05: Sunway Bhd issue of four bonus shares for every three existing shares and three free warrants for every 10 shares has enlarged its share capital to 4.8 billion, resulting in 2.8 billion new ordinary shares and 630 million new warrants being listed on Oct 6.

The exercise price of the free warrants is fixed at RM1.86. The value-enhanced warrants are a first of their kind with a fixed annual step-down mechanism of seven sen to encourage warrant conversion over the seven-year exercise period.

The exercise prices from 2018 to 2023 will be fixed at RM1.79, RM1.72, RM1.65, RM1.58, RM1.51 and RM1.44 respectively.

Sunway Bhd will raise cash of up to approximately RM1 billion from the exercise of warrants assuming full conversion by the seventh year. Although there is no immediate plan on the utilisation of the proceeds, we expect most of them will be for expansion.

Additionally, Sunway Bhd plans to invest RM1 billion in its healthcare services segment by building five new hospitals within the next five years with two hospitals in Sunway Penang and one each in Sunway Velocity Cheras, Sunway Damansara and Sunway Ipoh.

It also plans to increase the total number of beds in Sunway Medical Centre Sunway City to 618 (+65.7% year-on-year) by the end of the 2017 financial year (FY17) and up to 1,000 beds over the next two-and-a-half years.

The unbilled property sales of RM1.2 billion and a record-high construction order book of RM6.5 billion (including the recently secured light rail transit [LRT] Line 3 package for RM2.17 billion) will likely underpin our projected core earnings per share (EPS) growth 22% in FY18.

At the estimated current FY18 PER of 13 times, Sunway Bhd is trading at a discount to construction-property conglomerate peers Gamuda Bhd, IJM Corp Bhd, Malaysian Resources Corp Bhd and WCT Holdings Bhd (PER range of 13-20 times).

We maintain our buy call on Sunway Bhd with an adjusted TP of RM2.05 from RM4.90, based on a 20% discount to revalued net asset value. — Affin Hwang Capital, Oct 13