Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM1.11 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 RM99.5mil building job from sister company Sunway Marketplace Sdn Bhd for a 14-storey hotel block in Medini, Iskandar Malaysia, with a construction period ending 3Q20.

• This latest contract has boosted Sunway Construction’s YTD job wins to RM967.2mil and outstanding construction order book to RM5.9bil (Exhibit 1). No change to our forecasts that assume construction job wins of RM1.3bil annually in FY19–21F.

• Separately, Sunway Construction has inked an MoU with Capital Construction Ltd, the construction arm of Myanmar conglomerate Capital Diamond Star Group to jointly bid for building and infrastructure jobs in Yangon and Mandalay. We see this as a step in the right direction for Sunway Construction given the potential prolonged downturn in the construction market in Malaysia as the government tightens its belt. However, we are mindful of the high risk of doing business in a developing economy.

• 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 can weather the sector downturn better given 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 17–18x forward earnings on muted sector prospects.

Source: AmInvest Research - 2 Apr 2019