Investment Highlights

• We cut our FY18-20F earnings forecasts by 25%, 30% and 25% respectively, reduce our FV by 24% to RM1.53 (from RM2.00) and downgrade our call to UNDERWEIGHT from HOLD. Our new FV is based on 12x revised FY19 EPS, in line with our benchmark forward PE of 10-12x for mid-cap listed construction companies.

• We came away from a recent visit to the company feeling cautious on its outlook. We lower our assumption for job wins in FY18-20F to RM1.5bil annually (from RM2bil) to bring ourselves in line with the company’s latest construction order book replenishment target of only RM1.5bil in FY18F.

• So far in FY18F, Sunway Construction has secured new jobs worth a total of RM854mil while its outstanding construction order book now stands at RM5.6bil (Exhibit 1). Currently, it is eyeing a third-party superstructure job (It stands a very good chance by virtue of it being the piling contractor for the project) as well as parent Sunway Bhd’s various new hospital and shopping mall projects.

• We also lower our projected construction billings in FY18-20F from Sunway Construction’s LRT3 packages, i.e. Sections GS07 and GS08 (Outstanding value at RM2.1bil at present). We understand that works on the six stations under Sunway Construction’s packages have not progressed as Prasarana embarks on initiatives to downsize those stations. In addition, Prasarana is in favour of carrying out the project on a normal pace, vs. on an expedited basis previously as the latter incurs various escalation costs (such as overtime expenses).

• In anticipation of a lull period ahead for the local construction sector, we understand that a team from Sunway Construction recently visited India to “rekindle the past relationships” with some of its former construction JV partners in India. Sunway Construction sees opportunities in infrastructure projects in India such as highway, metro as well as high-speed rail.

• We remain cautious on the outlook for the local construction sector. As the government scales back on public projects, local contractors will be competing for a shrinking pool of new jobs in the market. Severe undercutting among the players will result in razor-thin margins for the successful bidders. On the other hand, the introduction of a more transparent public procurement system under the new administration should weed out rent-seekers, paving the way toward healthier competition within the local construction sector.

• We believe Sunway Construction is mitigated by its substantial order backlog that should keep it busy over the next 1-2 years, coupled with its proven ability to compete under an open bidding system. However, valuations are unattractive at 13-16x forward earnings on muted sector prospects.

Source: AmInvest Research - 18 Sept 2018