Investment Highlights

• We cut our FY21F net profit forecast by 9% (largely to reflect the halt in construction activities during the 28-day Movement Control Order or MCO period) but keep our FV relatively unchanged at RM1.19 as we roll forward our base year to FY21F. Our FV is now based on 10x FY21F EPS, in line with our benchmark forward P/E of 10x for large and mid-cap construction stocks. Maintain UNDERWEIGHT.

• Sunway Construction, via a 60:40 consortium with local partner RNS Infrastructure Ltd, has secured a 865 crore (RM508mil) contract for the construction of the Thorapalli Agraharam – Jittandahalli Section of NH-844 from Km 25.000 to Km 63.500 in Tamil Nadu, India, from the National Highways Authority of India (NHAI) under the hybrid annuity model. NHAI will pay the consortium 40% of the project cost in the first two years (during construction) with the balance 60% in fixed annuities plus interest over 15 years. The consortium has no toll right for the highway and does not carry the traffic risk. The consortium has also been awarded a 15-year operating and maintenance contract worth 7.08 crore (RM4.2mil) annually.

• This latest contract is the first major contract Sunway Construction has secured in FY20F, boosting its outstanding construction order book to RM5.4bil (Exhibit 1). No change to our assumptions on construction job wins of RM1.5bil and precast product order replenishment of RM200mil annually in FY20-22F. This is slightly more conservative as compared with Sunway Construction’s guidance for RM2bil new jobs (construction and precast product).

• We believe the recent change in the political landscape has not altered the subdued outlook for the local construction sector. Given the still elevated national debt, coupled with the recent collapse of oil prices that will hurt petroleum revenues, we believe the government has very limited room for fiscal manoeuvre which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term, such as the MRT3 and the KL–Singapore high-speed rail.

• 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 still unattractive at 13–14x forward earnings despite the recent steep correction in share price.

Source: AmInvest Research - 27 Mar 2020