Investment Highlights

• We raise our FY21–22F net profit forecasts by 3% each, and increase our fair value by 3% as well to RM1.55 (from RM1.51). This is based on 12x revised FY21F EPS, in line with our benchmark forward P/E of 12x for large and midcap construction stocks. Maintain UNDERWEIGHT.

• Sunway Construction, via a 60:40 consortium with local partner RNS Infrastructure Ltd, has secured a 554 crore (RM315mil) contract for the construction of the Meensurutti-Chidambaram section of NH-227 from Km 98.433 to Km 129.965 in Tamil Nadu, India, from the National Highways Authority of India (NHAI) under a hybrid annuity model.

• The 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 1.5 crore (RM0.9mil) annually.

• This is the second Indian highway project based on a hybrid annuity model the consortium has secured this year. Recall, in Mar 2020, it bagged 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, also in Tamil Nadu, India,

• Separately, Sunway Construction has also secured three solar photovoltaic system projects from F&N Group for RM18.1mil.

• The latest job wins, RM333mil in total, boosted its YTD new construction jobs secured to RM2.28bil and outstanding construction order book to RM5.8bil (Exhibit 1).

• We raise our assumption for FY20F construction job wins to RM2.3bil (from RM2.0bil) while keeping those for FY21– 22F at RM1.5bil annually as we are more inclined to see FY20F as an exceptional year that may not recur given the still weak outlook for the local construction and property sectors.

• Given the still elevated national debt, 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.

• Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.

• 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 14–34x forward earnings on muted sector prospects

Source: AmInvest Research - 30 Oct 2020