Investment Highlights

• We maintain HOLD on Sunway Construction (SunCon) with an unchanged fair value (FV) of RM1.69/share based on 14x FY23F PE, in line with our benchmark for large-cap construction stocks. We also ascribe a 3% premium to reflect our 4-star ESG rating.

• During our recent engagement with the company, SunCon reiterated that most of its ongoing construction projects are at the post-structural intensive stage, hence the impact from elevated building material costs is manageable. For newer tenders, the higher costs are being priced in through increased contract value. SunCon also expects labour shortages to ease in the coming months.

• According to the Ministry of International Trade and Industry (MITI), the steel bar price has tapered off by 9% from the peak of RM3,525/tonne in April to RM3,205/tonne in early July 2022. On the other hand, cement prices rose 11% to RM19 per 50kg in June 2022 from RM17 per 50kg in June 2021.

• SunCon also said that the commissioning of its 49%-owned integrated construction and prefabrication hub’s (ICPH) precast plant in Singapore is on track, tentatively in August 2022. The commissioning of the ICPH plant will increase SunCon’s annual precast capacity to 200m3 from 126m3. We expect the plant to contribute positively to SunCon’s earnings from FY23F.

• According to Singapore’s Housing and Development Board, the supply of new build-to-order flats is projected to be ramped up to 23K per year in 2022F and 2023F, from 17K in 2021.

• We maintain our order book replenishment of RM1.7bil annually in FY22F–24F on expectations of job flows recovering in 2HFY22. Potential replenishment could come from:
  (i) internal building jobs from its parent and sister companies under the Sunway Group, which is targeting new launches of RM2.3bil in FY22F.
  (ii) elevated portions of the MRT3, which include CMC301 (estimated at RM2.1bil) or CMC302 (estimated at RM9.7bil). We believe SunCon is a strong contender due to its strong balance sheet and proven track record.
  (iii) higher precast orders from the ICPH plant; and
  (iv) warehouse & data centres.

• Challenges faced by SunCon include: (i) rising building material costs; and (ii) delays or shelving of mega projects.

• We view the stock as fairly valued with limited upside at a forward PE of 13x vs. our benchmark for large-cap construction stocks of 14x.

Source: AmInvest Research - 8 Jul 2022