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 RM781mil contract for the construction of Tenaga Nasional’s headquarters campus along Jalan Bangsar, KL, comprising four office towers, a convention centre and other facilities.

• This is the first key job Sunway Construction has secured in FY19F, boosting its outstanding construction order book to RM5.7bil (Exhibit 1). No change to our forecasts that assume construction job wins of RM1.5bil annually in FY19–20F.

• We hold the view that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals, triggered by: (1) a major cutback in public infrastructure spending over the medium term as the government adheres to fiscal prudence; and (2) the permanent reduction in overall margins for players in the absence of high-margin directly-negotiated government jobs, as the government observes higher standards of transparency and accountability in public procurement.

• We believe Sunway Construction is mitigated by its proven ability to compete under an open bidding system, coupled with the availability of building jobs from its parent and sister companies under the Sunway group. However, valuations are unattractive at 12–14x forward earnings on muted sector prospects.

Source: AmInvest Research - 20 Feb 2019