Integrated business model for Sunway’s competitiveness

Sunway Bhd (Oct 14, RM3.06)

Maintain buy call with an unchanged target price of RM3.72: We attended Sunway Bhd’s analyst briefing last Thursday and uphold our positive view on the company. With the deferred launch of Sunway Geo Residences 3 (gross development value [GDV] of RM400 million) and Sunway Iskandar (GDV of RM400 million) as well as the conversion of Velocity Offices (GDV of RM200 million) into property investment assets, effective sales target for financial year ending Dec 31, 2016 (FY16) will be adjusted slightly from RM1.1 billion to RM900 million.

The deferred launch of Sunway Geo Residences 3 is mainly due to resubmission of plan for the subdivision of land to include additional walkway connecting to the bus rapid transit line. The effective sales for the nine months in FY16 already achieved RM638 million, which was contributed mainly by Sunway Mont, Iskandar, Gandaria, Singapore and China.

With the deferred launch of the two projects in FY16, Sunway is targeting RM2 billion worth of launches in FY17 (versus RM800 million in FY16). We have assumed effective sales target of RM1.2 billion (up 30% year-on-year) which we believe is likely to be achieved.

We continue to like its strong foothold in integrated township development, which is further underpinned by retail, healthcare and education elements. Non-property division contributed 60% of profit after tax and minority interests, which is recurring.

The active effort on capital management will continue to reward shareholders given the potential RM2 billion worth of assets to be injected into real estate investment trusts in the near future.

With the opening of a cancer centre in Sunway Hospital, total beds will be increased from 400 to 600 in FY17. Sunway is targeting a total of 1,000 beds with new hospitals in Sunway Velocity and Seberang Perai. Potential listing of the healthcare division could be one of the rerating catalysts.

Sunway Velocity, which has a net leasable area of 880,000 sq ft, has secured a 90% occupancy rate and is expected to open by December this year. Meanwhile, Velocity Hotel, with 350 rooms, is under construction and is due for opening in 2H17.

Risks to its real estate business include prolonged downturn in Johor’s property market and slowdown in property demand due to the tightening of loan approvals. Nevertheless, we like the company given its unique integrated real estate business model which provides a competitive edge over its competitors. Active capital management will continue to reward shareholders. — HLIB Research, Oct 14

This article first appeared in The Edge Financial Daily, on Oct 17, 2016. Subscribe to The Edge Financial Daily here.