CGS-CIMB Research said it is taking comfort in the fact that Sunway has shown financial discipline in not overpaying for acquisitions.
PETALING JAYA: CGS-CIMB Research is keeping its bright outlook for Sunway Bhd
, after news emerged on Wednesday that its subsidiary, Sunway Healthcare Group Sdn Bhd (SHG), is unlikely to acquire competitor Ramsay Sime Darby Healthcare (RSDH).
Instead, citing a news report from Tuesday, the research house said TPG-backed consortium Columbia Asia has emerged as frontrunner to buy RSDH for approximately US$1.5bil.
CGS-CIMB Research said it is taking comfort in the fact that Sunway has shown financial discipline in not overpaying for acquisitions, as shown in recent land deals, and not aggressively pursuing RSDH at potentially lofty valuations.
As such, it is upgrading its sum-of-parts (SOP) valuation of SHG from RM7.2bil to RM10.9bil, an increase of roughly 51%.
More importantly, it believes the apparent non-acquisition of RSDH should not derail SHG’s potential initial public offering in 2026.
The research house reported that as at November 2023, SHG has three hospitals in its portfolio, with a total of 1,563 beds, including the expansion of two hospitals slated for completion by the final quarter of this year.
“It also has a healthy pipeline of hospitals coming on stream, namely Sunway Medical Centre (SMC) Ipoh and SMC Damansara, which will add a combined 600 beds,” said CGS-CIMB Research in a note.
The brokerage firm noted that back in August, the group had alluded to a listing enterprise value over earnings before interest, tax, depreciation and amortisation (EV/Ebitda) multiple of 20 times, with an Ebitda of RM800mil to RM900mil for SHG, implying an EV of RM16bil to RM18bil.
CGS-CIMB Research pointed out that this estimate had likely factored in the potential RSDH win, and therefore it believes a more realistic expectation is for Ebitda to hit the RM500mil to RM600mil range for the financial year ending Dec 31, 2026.
According to the research house, SHG had achieved an Ebitda of RM300mil for the year ended December 2022.
It said: “We believe SHG’s strength and execution expertise are demonstrated by the increase in its revenue for the first half of 2023 and pre-tax profit by 38% and 29% year-on-year, respectively, despite startup losses from SMC Penang and Sunway Sanctuary.”
CGS-CIMB Research also favours Sunway as a diversified investment proxy for a robust domestic economy and its growing exposure to healthcare, although key downside risks include a slowing economy and rising raw material costs, as both may have a negative impact on margins.
The research house, which has an “add” call on the stock, maintained a target price of RM2.57 on Sunway.
