Brokers' take: Stake sale to GIC paves way for eventual IPO of Sunway's healthcare arm

UOB Kay Hian on Thursday said GIC's US$180 million stake acquisition in Sunway Berhad's healthcare business at a "robust valuation" paves the way for its eventual initial public offering (IPO).

GIC will buy a 16 per cent stake in an agreement that values Sunway Healthcare at about RM4.69 billion (S$1.5 billion), which is more than half of Sunway's RM8.78 billion market value.

The move lays out the timing for Sunway Healthcare's IPO to be in six to seven years, UOBKH said. It maintains its "buy" call on the stock with a higher sum-of-the-parts (SOTP) target price of RM2.25 from RM1.92, after factoring in the higher valuation for Sunway Healthcare.

"We believe valuation could rise over time, riding on Sunway Healthcare's good growth prospects," the research team said.

UOBKH's SOTP-based valuation is pegged to normalised earnings in 2022. The target price is also 20 times the research team's estimates for FY2022 earnings and 1.3 times the book value.

The research team has lowered its discount to the SOTP-based valuation to 10 per cent from 15 per cent as it believes the strong growth trajectory of Sunway Health could help Sunway Berhad build a formidable growth engine and increase its valuation over time.

GIC's investment amount will be disbursed to Sunway in four tranches over three years. The Singapore sovereign wealth fund will be entitled to 3 per cent per annum dividend on the cumulative invested amount, a stock filing showed.

Sunway Healthcare operates two tertiary hospitals with a combined capacity of over 800 beds and plans to build up to six more hospitals. Expansion plans should increase capacity to approximately 3,000 beds in three to four years.

Shares of Sunway Berhad closed on Thursday at RM1.73, down RM0.05.