Investment Highlights

• We maintain our forecasts and fair value of RM1.80 based on 14x FY22F EPS plus a 3% premium to reflect a 4-star ESG rating as appraised by us (Exhibit 5). The 14x multiple is in line with our benchmark forward PE for large-cap construction stocks. Maintain HOLD.

• Sunway Construction has returned to India since 2020 following the award of two highway projects based on a hybrid annuity model, both in Tamil Nadu, namely: (1) the Thorapalli Agraharam–Jittandahalli section of NH-844 (RM508mil); and (2) the Meensurutti–Chidambaram section of NH-227 (RM315mil). The two projects with a combined value of RM823mil now make up about 16% of Sunway Construction’s outstanding construction order book of RM5.2bil (Exhibit 2).

• With the Covid-19 infection situation in India spinning out of control in recent weeks and potentially into a prolonged crisis, we believe there could be concerns on Sunway Construction over: (1) the progress of its projects in India, and hence the impact on its earnings; and (2) the safety of its staff in India, and hence the impact on its ESG rating.

• Nevertheless, we draw comfort from these following findings, from both our recent engagement with the company as well as publicly available information:

1. The Tamil Nadu state at the southern tip of India is not considered one of the epicentres of India’s massive second Covid-19 wave, with only 16,233 confirmed cases per 1mil population, according to statistics compiled by crowd-sourced website Covid19India (Exhibit 1). This compares with 47,396 of the Kerala state and 39,057 of the Maharashtra state on the west coast, and 61,218 of Delhi;

2. The sites of both Sunway Construction’s projects are in the sparsely populated outskirt of the Tamil Nadu state – one in the Chidambaram municipality (with a population of 62,153 based on 2011’s Census of India) and the other in the Thorapalli village (with a population of 9,849 based on the 2011 Census of India); and

3. Sunway Construction only has a handful of staff members (Malaysia and India nationals) in India and they work remotely from Hyderabad in the Telangana state with relatively low confirmed Covid-19 cases.

• We remain cautious on the outlook of the local construction sector. The recent news on the MRT3 potentially commencing work in the second half of the year aside, the fact remains that the government will have very limited room for fiscal manoeuvre given the elevated national debt, weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic.

• 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 fair at 13–17x forward earnings on muted sector prospects.

Source: AmInvest Research - 6 May 2021