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 has secured a RM100mil contract from sister company Sunway Integrated Properties Sdn Bhd for the construction of a 22-storey mixed tower comprising commercial, office and residential units in Kuala Lumpur, with a construction period of 29 months ending April 2021.

• The latest job has boosted its YTD construction job wins (excluding precast orders) to RM1.32bil and its outstanding construction order book to RM5.48bil (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 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 11-13x forward earnings on muted sector prospects.

Source: AmInvest Research - 6 Dec 2018