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HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 17 May 2019, 10:45 AM

 

Sunway Construction Group - Priced to Perfection

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Suncon is planning to bid for LSS3 jobs (RM2bn) as EPCC contrac tor in the form of JV with foreign partners. 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. We expect the precast segment PBT margin to normalize back to 10-15% starting from 2H19 due to recovery of product pricing. Management does not expect any more contracts from its parent-co in FY19 and hence the balance to its replenishment target is expected to come from overseas contract, piling jobs and also precast orders from Singapore. Maintain forecast and HOLD rating with unchanged TP of RM1.81, based on an unchanged 16.5x PE multiple tagged to FY19 earnings.

We Met Up With the Management of SunCon Recently With the Following Key Takeaways:

LSS3. Suncon is planning to bid for LSS3 (large scale solar) jobs (RM2bn) as EPCC contractor via 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 sizes of job that Suncon can bid for. The tender is closing in Aug 2019 and an outcome is expected by Feb 2020.

Domestic opportunities. Suncon is actively looking for hospital job opportunities given that as much as RM29bn 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.

Exploring foreign ground. Given the slowdown in the domestic construction industry, SunCon is actively exploring for regional opportunities particularly in India and ASEAN. We understand the company is currently bidding for a highway construction contract in India worth RM900m. Separately, Suncon has entered into a MoU with Myanmar conglomerate 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 that there is under-supply for piling capacity in the country at the moment.

Precast. Precast segment PBT margin dropped significantly as the precast projects in Singapore were secured at a time when the industry was very competitive. Competitive pressure has come down and the product pricing has recovered but we only expect the segment PBT margin to normalize back to 10-15% starting from 2H19 as contribution from newly secured projects takes time to kick in.

Orderbook. Management has reiterated its FY19 orderbook replenishment target of RM1.5bn, of which, RM967m has been achieved YTD. Management does not expect any more contracts from its parent-co in FY19 and hence the balance to its replenishment target is expected to come from overseas contract, piling jobs and also precast orders from Singapore. Outstanding orderbook currently stands at RM6.2bn, translating into healthy level of 2.7x cover of FY18 revenue.

Forecast. Maintained as the meeting yielded no major surprises.

Maintain HOLD, TP: RM1.81. Maintain HOLD with unchanged TP of RM1.81, based on an unchanged 16.5x PE multiple tagged to FY19 earnings. While we like SunCon as a well-managed contractor, we reckon that valuations are fair at current levels.

Source: Hong Leong Investment Bank Research - 19 Apr 2019

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