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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 4 Dec 2020, 8:55 AM

 

Sunway Construction Group - Exceeds Replenishment Targets

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Suncon surprisingly announced new contracts worth RM333m, bringing YTD contracts won to RM2.3b, exceeding our/management’s FY20E replenishment of RM2.0b. Post these wins, we increase our replenishment target to RM2.5b but deferred billings recognition for certain delayed projects kept our earnings forecasts unchanged. Maintain OP with unchanged TP of RM2.45.

New jobs in the bag. Suncon has announced four new contracts worth RM333m comprising: (i) a 32-km highway in India from Meensurutti to Chidambarm worth RM315m awarded by National Highway Authority of India, and (ii) three rooftop solar projects worth RM18m at F&N’s factories in Karak, Shah Alam and Pulau Indah. The Indian highway is commencing in 2QCY21 with expected completion is within 24 months while the other three solar projects will be completed in 12 months.

Second Indian highway contract in FY20. This is Suncon’s second Indian highway project won this year under the Hybrid Annuity Model whereby 40% payment (of RM315m) will be made during the construction period while the remaining 60% will be made during the 15-year concession/maintenance period under a fixed annuity model – hence, no traffic risks involved.

Delayed commencement for its first Indian highway project. The RM508m Indian highway project won in Mar 2020 that was supposed to start construction in Oct 2020 had deferred commencement to 2QCY21 as the client has not completed the land acquisitions to allow Suncon to start works. Unlike this newly secured project with completed land acquisitions, construction will be able to commence soon.

Exceeded target. Overall, we are positive on the new contracts as they bring cumulative contracts won to-date to RM2.319b, exceeding our/management’s FY20 replenishment target of RM2.0b by 16%. Current outstanding order-book stand at c.RM6.0b providing a robust revenue cover of 3x.

For the remainder of FY20, management is no longer expecting any new contracts. That said, we raise our replenishment target to RM2.5b (from RM2.0b) to cater for any unexpected wins like these four new contracts. New wins could possibly come from their precast segment or more solar projects.

Prospects in LSS4. We note that Suncon being the contractor, had assisted several clients to tender for the LSS4 Independent Power Producer (IPP) role. Suncon and the clients are eyeing for 30MW-sized projects that could amount to RM150m worth of construction works for Suncon. Tentatively, tender results should be out in 1QCY21.

No change to earnings forecasts. Despite raising our replenishment forecast, we also defer billings recognition for the delayed Indian highway project worth RM508m – keeping our FY20-21E forecasts unchanged.

Maintain OUTPERFORM with an unchanged SoP-derived TP of RM2.45 based on a construction PER of 18x (+1SD above its 5-year mean). We think our premium PER valuation is justified for Suncon vs other contractors given its low risks nature from a receivable, replenishment and execution perspectives – the three key risks that really matters to a contracto

Source: Kenanga Research - 30 Oct 2020

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