Saturday, 17 June 2017

(The Star) Sunway Medical could be worth at least RM1.5bil

Sunway Group’s healthcare division, which is slated for a listing in two years, should carry a value of at least RM1.5bil when it goes public.

This is based on back-of-the-envelope calculations by ascribing a price to earnings multiple enjoyed by healthcare listings on Bursa Malaysia to this unit.

Sunway’s healthcare division, namely Sunway Medical, reported a pretax profit of RM37.65mil in the financial year 2016 (ended Dec 31) and ascribing a price to earnings (PE) multiple of around 40 times to this, it is worth about RM1.5bil.

That PE multiple may seem high but not unreasonable when compared to what healthcare stocks are trading at present on Bursa Malaysia.

The main pure-play hospital groups listed on the Malaysia market are IHH Healthcare Bhd, KPJ Healthcare Bhd and TMC Life Sciences Bhd and they trade at lofty PE multiples of 58, 37 and 73 times respectively.

“Sunway Medical should sit right in between the two big groups (of IHH and KPJ) in terms of earnings multiples.

“It has a better perception branding than KPJ hospitals but it is much smaller than IHH, which is globally the largest listed hospital group,” a banker points out, noting that TMC which is a much smaller operator, is valued more as a growth stock given their growth plans in the pipeline.

Notably, Sunway Medical could fetch an even higher value upon its listing in two years should profits, which have been steadily growing for this division in the past three years, grow further or if appetite for healthcare assets grows stronger.

This week, Sunway Group founder and chairman Tan Sri Jeffrey Cheah indicated that they have firm plans to list its healthcare business in two years’ time and that healthcare is the way forward for the group and it plans to build five more hospitals.

Sunway Medical is a wholly owned unit of Sunway Bhd.

When it goes public in two years, Sunway Medical will become the third largest publicly listed hospital entity on the Bursa Malaysia by bedcount.

The group has already announced several greenfield expansion plans that is poised to grow earnings further.

It will do so by pumping in some RM1bil in capital expenditures to open new hospitals in addition to its flagship Sunway Medical Centre located at Bandar Sunway presently.

The increased focus on the healthcare sector also comes at a time where the property market in Malaysia is still going through a tough time.

Sunway, now being a predominantly property and construction company will divert more of its attention and resources to the healthcare sector amid the still hazy outlook for the Malaysian property scene.

The group also derives some earnings from its circa 37% holdings in Sunway Real Estate Investment Trust (REIT) that sees mall dominance among consumers being challenged by the online retailers.

Analysts expect that Sunway will still hold on to a substantial majority stake in the soon to be listed healthcare entity, similar to what it had done with Sunway REIT.

The group’s planned capacity expansion of its flagship Sunway Medical Centre, Sunway Petaling Jaya would see it increase bed count to 1,000 in 2½ years from 630 beds at present.

This expansion would come onstream just shortly after its listing and would help pique increase interest in its initial public offering (IPO).

Sunway is planning another hospital at Sunway Velocity, Cheras with an initial bedcount of 240 that would be completed by end-2018.

More hospitals are also planned over five years through expansions in Sunway Damansara, Ipoh, Penang (two hospitals) and another one in Sunway Iskandar, Johor.

Bedcounts for these hospitals are not yet set as finer details have not yet been decided, according to the company.

Such a strong expansion would put Sunway just behind IHH Healthcare in Malaysia.

KPJ, which derives some 90% of its revenues from Malaysia is the largest private medical hospital operator locally with around 3,000 beds today.

IHH, the second largest public listed hospital operator the world and the largest in Asia has 2,143 beds in Malaysia at the moment.

Ramsay Sime Darby Healthcare, a 50:50 joint venture between Sime Darby and Australian-based Ramsay Healthcare owns three hospitals in the country at the moment.

A company representative from Ramsay Sime Darby tells StarBizWeek it has no immediate plans to expand capacity at the moment and that bedcount will remain as it is in two years.

Meanwhile, the plan to monetise Sunway’s hospital assets have received a warm welcome from investors with its shares receiving a boost when the announcement was made on Thursday’s market open.

Sentiment was also boosted due to the announcement of a 4 for 3 bonus issuance and free warrants (3 for 10) exercise.

Kenanga Research notes in its report that Sunway’s management is also capitalising on aggressively promoting and capitalising on medical tourism as a strong contender to Singapore with similar medical care standards amid the weak ringgit scenario at present.

“We believe that growing their medical division would provide them a sustainable income stream in the future, which would further mitigate their risk in the property and construction business which are highly cyclical,” Kenanga says.