Investment Highlights

• We maintain our forecasts but reduce our fair value by 17% to RM1.27 (from RM1.53) based on 10x FY19 EPS (from 12x previously), which is still in line with our benchmark forward P/E of 10-12x for mid-cap construction stocks. The downgrade in P/E multiple is to reflect the continuing sector de-rating. Maintain UNDERWEIGHT.

• Sunway Construction has secured a RM352.1mil contract from sister company Sunway Velocity Two Sdn Bhd for the construction of an office tower and two apartment blocks in Sunway Velocity Two development in Jalan Peel, Kuala Lumpur, with a construction period of 37 months beginning November 2018.

• The latest job has boosted its YTD construction job wins (excluding precast orders) to RM1.2bil and its outstanding construction order book to RM5.95bil based on our estimates (Exhibit 1). We are keeping our forecasts that assume construction job wins of RM1.5bil annually in FY18-20F.

• 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 11-14x forward earnings on muted sector prospects.

Source: AmInvest Research - 14 Nov 2018