SunCon on strong footing to bag key 11th M’sia Plan jobs

Sunway Construction Group Bhd (Oct 20, RM2.30)

Maintain hold recommendation with a target price (TP) of RM2.60: Sunway Construction Group Bhd (SunCon) is the largest listed pure-play construction company in Malaysia.

Given its strong track record with mass rapid transit (MRT), light rail transit (LRT) and bus rapid transit (BRT) jobs previously, we are of the view that SunCon is on a strong footing to bag several key infrastructure packages from Eleventh Malaysia Plan projects. SunCon has also established itself as the only construction specialist to be involved in all three Rapid Line infrastructure projects (MRT, LRT and BRT).

We had argued that purer-play contractors should not trade at too steep a discount to the larger-cap diversified players like IJM Corp Bhd, Gamuda Bhd and WCT Holdings Bhd in times of a construction upcycle, when there is sustained development spending from high-multiplier projects like MRT, LRT, the High-Speed Rail and East Coast Rail Line. Nonetheless, this valuation gap has narrowed significantly. At current valuations, we think the stock is looking fairly valued.

SunCon has surpassed its RM2 billion new win forecast for financial year 2017, with RM3.9 billion wins year to date. Given its peak order book of RM6.5 billion now, we do not expect incremental new wins to be a key catalyst for the stock. In our view, a flawless execution track record leading to a potential uplift in earnings could be the next catalyst for the stock.

Our TP is based on sum-of-parts valuation to reflect the growing contribution from its high-margin precast business. We believe pure-play construction players should at least trade closer to their more diversified larger-cap peers in times of rising government development expenditure.

Timely execution of its peak order book of RM4.3 billion is crucial to minimise the risk of any earnings cuts. With its strong execution track record and experience, we believe the group is able to execute the projects in a timely manner. — AllianceDBS Research, Oct 19

This article first appeared in The Edge Financial Daily, on Oct 23, 2017.

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