Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.27 based on 10x FY19 EPS, in line with our benchmark forward P/E of 10x for large- and mid-cap construction stocks.

• Sunway Construction’s 9MFY18 net profit came in within our expectations at 73% of our full-year forecast but missed market expectations at only 69% of the full-year consensus estimates.

• Its 9MFY18 net profit grew 5% YoY driven by higher construction profits (arising from the Parcel F building job in Putrajaya, Package V201 of the MRT2 and International School of Kuala Lumpur building contract in Ampang), partially offset by lower precast profits (due to the completion of several projects coupled with higher rebar prices).

• YTD, Sunway Construction has secured new jobs worth a total of RM1.22bil while its outstanding construction order book stands at RM5.38bil (Exhibit 1). Sunway Construction told us during a recent meeting that it is eyeing a thirdparty superstructure job (which 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. Our forecasts assume construction job wins of RM1.5bil annually in FY18-20F. Meanwhile, for its precast segment, the YTD new job wins stand at RM130mil while the order backlog stands at RM226mil.

• 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 backlogs 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 12-14x forward earnings on muted sector prospects.

Source: AmInvest Research - 21 Nov 2018