Sunway Construction Group seen banking on overseas jobs

Sunway Construction Group Bhd (April 19, RM2)

Maintain hold with an unchanged target price (TP) of RM1.81. We met up with the management of Sunway Construction Group (SunCon) recently with these key takeaways.

SunCon is planning to bid for the third cycle of the large-scale solar (LSS3) scheme jobs (RM2 billion) as engineering, procurement, construction and commissioning (EPCC) contractor via a joint venture (JV) with foreign partners that have the required experience and technical expertise. Total capacity for LSS3 is 500mw and the quota offered to each developer is 100mw. There is no limitation on job sizes that SunCon can bid for. The tender closes in August 2019 and an outcome is expected by February 2020.

SunCon is actively looking for hospital job opportunities given that as much as RM29 billion has been budgeted by the government in 2019 for new hospitals. Although we expect robust job flows from Sarawak in the near term; we understand that the company is cautiously evaluating tender opportunities in the state given potential low construction margin caused by overly competitive bidding.

Given the slowdown in the domestic construction industry, SunCon is actively exploring regional opportunities, particularly in India and the Asean region. We understand the company is bidding for a highway construction contract in India worth RM900 million. Separately, SunCon has entered into a memorandum of understanding (MoU) with Myanmar conglomerate Capital Diamond Star Group (CDSG). It is evaluating internal projects undertaken by CDSG and its member companies in which the CDSG-SunCon JV will be on a 65:35 basis. SunCon is also actively looking for piling jobs in Singapore and we understand there is undersupply for piling capacity in the country.

SunCon management has reiterated its financial year 2019 (FY19) order book replenishment target of RM1.5 billion, of which RM967 million has been achieved year to date. It does not expect any more contracts from its parent company in FY19 and hence the balance to its replenishment target is expected to come from overseas contracts, piling jobs and precast orders from Singapore. Outstanding order book stands at RM6.2 billion, translating into a healthy level of 2.7 times cover of FY18 revenue.

The unchanged TP of RM1.81 is based on an unchanged 16.5 times price earnings (PE) multiple tagged to FY19 earnings. While we like SunCon as a well-managed contractor, we reckon that valuations are fair at current levels. — HLIB Research, April 19

This article first appeared in The Edge Financial Daily, on April 22, 2019.

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